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THE  INVESTMENTS  OF  LIFE 
INSURANCE    COMPANIES 


1 


LIBRARY 


University  of  California. 


Class 


THE  INVESTMENTS  OF 

LIFE  INSURANCE 

COMPANIES 

BY 
LESTER  W.  ZARTMAN,  Ph.D. 

Instructor  in  Insurance,  Yale  University 


WNWERSJT 


£alif* 


NEW  YORK 

HENRY  HOLT  AND  COMPANY 
1907 


r  ^ 


V 


GtNtHAL 


Copyright,  1906, 

BY 

HENRY  HOLT  AND  COMPANY 


Published  December,  1906 


PREFACE. 

The  subject  of  this  book  was  chosen  in  1903  at  a  time 
when  insurance  questions  did  not  command  much  public 
attention.  Since  then  has  appeared  the  present  almost 
feverish  interest  in  problems  of  insurance.  There  had 
long  been,  however,  in  insurance  circles  rumors  that  the 
funds  of  certain  life  companies  were  being  improperly 
used.  It  was  therefore  one  purpose  among  many  others 
in  making  this  study  to  investigate  these  rumors. 

Before  the  work  was  completed,  such  an  inquiry  was 
rendered  largely  unnecessary  by  the  official  investigation 
by  a  committee  of  the  New  York  Legislature.  Conse- 
quently in  the  present  book  little  emphasis  is  laid  upon 
that  phase  of  the  subject,  and  we  have  been  enabled  to 
devote  a  larger  part  of  our  attention  to  the  more  congenial 
task  of  tracing  the  beneficent  influences  which  life  insur- 
ance accumulations  have  exercised  upon  the  economic 
development  of  the  country  and  the  relation  of  those 
accumulations  to  social  welfare. 

The  calculations  employed  in  chapter  three  are  so 
laborious  and  intricate  that  errors  may  quite  possibly 
have  crept  in ;  for  the  computation  of  these  rates  by  the 
method  adopted  required  a  repetition  of  the  process  of 
finding  one  annual  rate  as  described  on  page  seventy-two 

iii 

164163 


iv  PREFACE. 

some  five  thousand  times.     Great  care  has  been  taken, 
however,  to  verify  the  calculations. 

For  much  aid  in  the  preparation  of  the  statistical  tables 
and  in  the  gathering  of  data,  I  am  indebted  to  my  wife. 
I  am  also  under  obligations  to  Professor  Irving  Fisher  of 
Yale  University,  who  has  read  the  manuscript  and  to 
whose  criticisms  and  suggestions  much  of  the  work  in  its 
final  form  is  due,  and  to  Professors  David  Kinley  and 
Maurice  H.  Robinson  of  the  University  of  Illinois,  who 
in  the  early  stages  of  the  work  rendered  me  much  assist- 
ance. 

Finally,  I  wish  to  express  my  thanks  to  the  Faculty  of 
the  Department  of  Political  Economy  in  Yale  University 
for  permission  to  incorporate  in  this  book  its  prototype, 
my  thesis  for  the  degree  of  Doctor  of  Philosophy. 

Lester  W.  Zartman. 
New  Haven,  Conn.,  November,  1906. 


CONTENTS. 


CHAPTER  PAGK 

I.  Introduction 1 

II.  The  Character  op  the  Investments 9 

III.  Investment  Earnings 55 

IV.  The  Cost  op  Investments 112 

V.  Failures  of  Life  Insurance  Companies 127 

VI.  Legal  Regulation 146 

VII.  Control  of  the  Assets 190 

VIII.  Taxation  of  Insurance  Funds 213 

IX.  Social  Effect  of  the  Accumulation  of  Insurance 

Assets 234 

Index 255 


UN!'  Y  I 


THE  INVESTMENTS  OF 
LIFE  INSURANCE  COMPANIES. 


CHAPTER  L 


INTRODUCTION. 


Life  insurance  has  come  to  occupy  an  important 
place  in  our  economic  development.  This  has  come 
about  only  in  recent  times.  Just  as  there  are  men  liv- 
ing who  have  witnessed  the  great  development  of  rail- 
road transportation,  there  are  men  who  have  seen  life 
insurance  begin  with  a  few  companies  and  reach  the 
commanding  position  of  the  present  day.  True  it  is 
that  before  the  Revolutionary  War,  a  small  band  of 
clergymen  organised  a  company  for  the  purpose  of 
paying  death  benefits,  a  company  still  existing,  but  it 
was  not  at  that  time  conducted  on  the  principle  of  the 
present  day  companies,  nor  did  it  fill  an  important 
place  in  the  life  of  that  time.  During  the  colonial 
period  and  up  to  1800,  there  was  some  life  insurance 
business  done,  but  it  was  carried  on  by  individual 
underwriters  and  the  number  of  policies  written  was 
exceedingly  small. 

1 


2  INTRODUCTION. 

After  1800  companies  began  to  be  organised  to  carry 
on  the  business  of  life  insurance.  Up  to  1835,  no  com- 
pany was  organised  and  succeeded  which  had  for  its  sole 
purpose  the  insuring  of  lives,  but  three  important  trust 
companies  of  the  present  day  were  incorporated  be- 
tween 1812  and  1833  which  had  the  power  among 
others  of  insuring  lives.  All  three  for  some  time  did  do 
a  small  life  insurance  business.  In  addition  to  these 
three  trust  and  insurance  companies  combined,  a  num- 
ber of  the  more  prominent  fire  insurance  companies 
did  some  writing  of  life  insurance.  However,  all 
the  companies  were  proprietary  companies  organised 
chiefly  for  other  purposes  than  life  insurance  and  so 
far  as  they  influenced  life  insurance  history  in  this 
country  did  little  more  than  to  prove  definitely  that 
insurance  of  lives  could  be  carried  out  as  a  business 
proposition.  The  thirty-five  years  following  1800  can 
best  be  designated  as  the  experimental  period  in  the 
business  in  the  United  States. 

The  year  1835  has  been  selected  as  marking  the 
beginning  of  a  new  epoch  in  life  insurance  history,  for 
in  that  year  the  first  company  proposing  to  do  business 
on  a  mutual  basis  was  incorporated.  On  April  1,  1835 
the  New  England  Mutual  was  incorporated,  and  though 
it  did  not  commence  business  until  several  years  later, 
it  is  the  oldest  mutual  company  doing  a  regular  in- 
surance business.     In  1841  the  company  which  later 


INTRODUCTION.  3 

became  the  New  York  Life  was  incorporated,  and  in 
the  following  year  the  Mutual  Life  was  organised.  Be- 
fore 1850,  eight  more  companies  were  started  on  a 
permanent  basis,  making  eleven  companies  doing  a  life 
insurance  business  at  that  date,  the  permanency  of 
whose  foundation  is  evidenced  by  the  fact  that  all  of 
them  are  in  active  competition  at  the  present  time. 

Life  insurance  was  thus  firmly  established  in  this 
country  by  1850.  Successful  companies  had  been  or- 
ganised and  for  the  next  twenty  years  the  business 
grew  by  leaps  and  bounds.  The  one  million  dollars  of 
assets  possessed  by  the  few  companies  at  the  end  of 
1843  doubled  oftener  than  once  in  four  years,  amount- 
ing in  1867  to  one  hundred  and  twenty-four  million 
dollars.  Part  of  this  great  growth  was  unhealthy. 
From  1860  to  1870  life  insurance  had  been  fostered  by 
the  speculative  fever  then  prevalent  and  by  the  unset- 
tled condition  of  the  country  in  general.  Like  in  all 
other  lines  of  business  at  that  time,  a  period  of  depres- 
sion ensued,  and  the  life  insurance  business  did  not 
prosper  any  from  1870  to  1880.  After  1880  a  steady 
growth  set  in  which  continuing  has  placed  the  United 
States  far  in  the  lead  of  the  nations  in  regard  to  life 
insurance  interests.  Possessing  nine  hundred  millions 
worth  of  assets  in  1892,  the  companies  had  more  than 
doubled  that  amount  by  the  end  of  the  century,  and  at 
the  present  time  the  combined  assets  of  the  life  insur- 


4  INTRODUCTION. 

ance  companies  in  this  country  are  valued  at  nearly 
three  billion  dollars. 

These  figures  indicate  the  important  position  that 
life  insurance  has  come  to  fill  in  the  United  States  dur- 
ing the  last  half  century.  Great  companies  have  grown 
up  with  large  assets  which  have  exercised  a  tremendous 
influence  upon  the  country's  development.  The  life  in- 
surance companies  have  been  agencies  by  means  of 
which  large  sums  of  capital  have  been  saved,  and  this 
capital  once  in  the  possession  of  the  companies  has  been 
invested  in  mortgages  on  farms  and  on  city  realty,  in 
the  securities  of  railroads  and  of  banks,  has  been  loaned 
to  individuals  on  collateral  security  and  in  other  ways 
been  placed  at  interest.  Hence,  must  life  insurance  be 
considered  not  only  as  a  great  social  factor  because  of 
the  system  of  indemnity  it  affords,  but  also  from  the 
standpoint  of  the  saving  of  capital  which  it  has  effected. 

All  these  beneficial  results  have  not  been  accom- 
plished without  some  loss.  There  have  been  failures 
of  insurance  companies,  more  failures  than  successes, 
though  the  influence  of  such  failures  cannot  be  com- 
pared with  the  influence  of  the  companies  that  have  suc- 
ceeded. Other  companies  have  been  mismanaged,  and 
because  people  on  account  of  the  peculiar  nature  of  life 
insurance  are  not  able  to  protect  themselves,  the  states 
have  been  forced  into  much  activity  in  regard  to  insur- 
ance affairs.     Legislatures  have  found  it  necessary  to 


INTRODUCTION.  5 

throw  many  restrictions  around  the  business  in  order 
that  justice  might  be  done  to  the  purchasers  of  in- 
surance. 

The  immense  assets  which  the  companies  have  ac- 
cumulated have  offered  a  tempting  field  for  taxation. 
With  uniformily  bad  tax  laws  in  general,  coupled  with 
a  lack  of  knowledge  of  life  insurance  in  particular,  the 
various  states  have  levied  direct  and  indirect  taxes  up- 
on the  life  insurance  assets  which  in  many  cases  have 
been  unjust  and  have  hindered  the  development  of  the 
business.  Thus  confronted  with  the  problems  of  regu- 
lating the  insurance  business  and  at  the  same  time  of 
taxing  it,  legislatures  have  spent  much  time  during  the 
last  half -century  on  insurance  matters. 

In  the  following  chapters,  company  management, 
legal  regulation,  taxation  and  kindred  questions  will  be 
studied  so  far  as  they  are  concerned  with  the  assets  and 
their  investment.  The  material  for  such  a  study  is 
found  in  scattered  sources.  There  is  no  considerable 
body  of  literature  treating  of  the  insurance  business, 
if  we  except  that  dealing  with  its  theoretical  side. 
The  actuarial  branch  of  the  business  has  been  worked 
out  so  fully  that  little  remains  to  be  done,  but  concerning 
the  practical  problems  confronting  the  business,  only 
within  a  few  years  has  anything  been  written  in  book 
form.  The  official  state  reports  of  the  condition  of  the 
companies  are  by  far  the  best  source  of  information  con- 


6  INTRODUCTION. 

concerning  certain  phases  of  the  business.  The  greatest 
trouble  with  them  is  that  companies  have  misrepre- 
sented their  real  condition  to  the  state  officials  year 
after  year  without  apparent  detection,  but  even  so,  for 
a  history  of  the  investments  the  state  reports  are  in- 
valuable. 

Outside  of  the  state  reports,  there  is  the  insurance 
press  as  a  source  of  material.  In  the  files  of  the  in- 
surance papers  and  magazines  can  be  found  much  data 
on  almost  any  insurance  question.  This  is  especially 
true  of  the  early  history  of  the  business,  for  at  that 
time  the  insurance  papers  possessed  more  of  the  char- 
acteristics of  technical  publications  than  they  do  at 
present.  The  papers  have  increased  greatly  in  number, 
but  in  the  multiplication  of  numbers  and  the  change 
from  monthly  publications  to  weeklies,  they  have  be- 
come merely  newspapers  devoted  to  the  interests  of 
agents  and  contain  little  of  general  or  permanent  in- 
terest. Throughout  the  history  of  the  business  there 
have  been  certain  exceptions  to  this  criticism,  and  in 
the  files  of  some  of  the  publications  and  in  the  trans- 
actions of  various  actuarial  societies,  the  material  for 
the  following  chapters  has  been  gathered. 

Just  a  word  as  to  the  importance  of  life  insurance 
history.  Insurance  is  a  business  which  should  last  as 
long  as  men  die  during  the  productive  years  of  their 
life.     It  is  a  business  which  once  started  cannot  sud- 


INTRODUCTION.  7 

denly  be  dropped  with  justice  to  the  whole  body  which 
has  entered  into  the  relation  involved  in  insurance  con- 
tracts. Therefore,  the  history  of  it  should  be  studied 
so  that  in  the  future  the  mistakes  of  the  past  might  be 
avoided.  The  success  of  a  company  cannot  be  measured 
by  its  accomplishments  during  the  lifetime  of  one  man, 
unless  that  success  be  built  on  a  foundation  which  shall 
stand  the  test  of  generations.  If  information  of  the 
past  were  complete,  most  valuable  and  trustworthy  con- 
clusions might  be  drawn  as  to  the  causes  which  lead 
to  the  prosperity  or  the  decline  of  individual  life  offices 
and  doubtless  many  mistakes  in  management  and  regu- 
lation could  be  avoided. 

With  the  emphasising  of  one  point  in  life  insurance 
history  this  introductory  chapter  will  end.  There  is  a 
wide-spread  feeling  that  the  revelations  which  have  been 
made  in  New  York  during  the  summer  of  1905  will 
prove  such  an  object  lesson  to  company  managers  and 
to  policy-holders  that  the  business  for  years  will  be 
run  in  a  much  better  way.  This  feeling  is  not  justified 
by  a  study  of  history.  Revelations  have  been  made  be- 
fore concerning  insurance  companies  which  were  just 
as  scandalous  as  those  made  during  the  past  summer. 
The  result  was  a  change  in  management  just  as  there 
has  been  changes  in  managements  recently,  and  the 
public  was  led  to  believe  that  the  newly-managed  con- 
pany  would  be  conducted  on  a  high  standard  of  effi- 


8  INTRODUCTION. 

ciency.  In  some  cases  this  has  been  done.  In  others, 
the  management  has  become  just  as  false  to  the  interests 
of  the  policy-holders  as  was  the  previous  management. 
Therefore,  there  is  no  real  justification  for  the  feeling 
of  security  which  now  seems  to  exist.  The  old  manage- 
ments have  been  revealed  in  their  misdeeds  and  forced 
out  of  the  companies,  new  officials  have  been  put  in  with 
many  proclamations  of  future  good  service.  With  all 
due  regard  for  the  character  of  these  particular  individ- 
uals it  should  be  said  that  the  same  dangers  are  likely 
to  arise  again.  There  are  still  stock  companies  in  which 
the  policy-holders  have  no  control  whatever,  it  remains 
to  be  seen  whether  under  revised  laws  the  policy-holders 
are  going  to  exercise  any  real  control  over  their  com- 
panies, and  whether  any  system  can  be  devised  that  will 
change  the  apathetic  attitude  which  the  insuring  public 
has  always  taken  towards  insurance  management  save 
at  the  time  of  some  great  agitation.  Periodical  investi- 
gations and  temporary  reforms  will  be  the  rule  so  long 
as  policy-holders  do  not  exercise  an  active  control  in 
company  affairs. 


CHAPTER  II. 

THE   CHARACTER   OF    THE    INVESTMENTS. 

To  find  suitable  investments  for  the  funds  which 
have  come  under  their  control  has  been  a  serious  under- 
taking for  the  officials  of  level  premium  companies  from 
the  inauguration  of  that  system  of  life  insurance.  In 
the  early  days  of  the  larger  companies  and  of  new  com- 
panies of  to-day,  the  great  problem  has  been  to  get  in- 
surance in  force.  That  problem  has  been  solved  with 
signal  success,  and,  as  a  result,  the  funds  which  must 
be  accumulated  at  compound  interest  have  grown  rap- 
idly. As  the  assets  have  increased  in  amount  until 
they  have  reached  a  value  of  millions  and  even  hun- 
dreds of  millions  of  dollars  the  investment  side  of  the 
business  has  become  one  of  almost  supreme  importance. 
Because  of  the  gigantic  size  of  the  assets  great  skill  is 
demanded  for  their  proper  investment. 

One  condition  must  always  be  met  by  all  level  prem- 
ium companies,  both  large  and  small;  the  assets  must 
be  invested  in  such  a  way  that  at  all  times  they  will 
have  a  market  value  equal  at  least  to  the  reserve  upon 
the  policies.     This  is  required  by  law.    More  than  this 

9 


10         THE  CHARACTER  OF  THE  INVESTMENTS. 

is  demanded  by  the  policy-holders.  Few  of  these  have 
been  content  in  the  past  with  the  assets  earning  simply 
the  minimum  rate  of  interest.  The  higher  the  rate  of 
interest  earned,  the  larger  will  be  the  dividends  declared 
to  the  participating  policy-holders.  Therefore,  the  of- 
ficials in  charge  of  the  assets  have  been  required  to  in- 
vest the  funds  not  only  so  as  to  keep  them  at  a  certain 
market  value,  but  to  make  them  earn  as  high  a  rate  of 
interest  as  possible.  Confronted  by  this  double  prob- 
lem, investment  managers  of  different  companies  have 
solved  it  in  different  ways. 

Not  only  have  the  managers  of  different  companies 
solved  the  investment  problem  in  different  ways,  but 
those  of  the  same  company  have  seen  fit  to  change  the 
character  of  their  investments  from  year  to  year.  It  is 
the  purpose  of  the  present  chapter  to  study  these  dif- 
ferences in  the  character  of  the  assets  both  from  the 
standpoint  of  differences  between  the  companies  and 
more  especially  of  differences  between  the  showing  of 
the  years. 

To  go  back  in  the  history  of  the  companies  as  far 
as  possible  takes  us  back  to  the  time  when  there  were  no 
state  insurance  departments.  The  information  which 
the  official  reports  now  give  must  be  secured  for  the 
early  years  from  the  reports  issued  by  the  companies 
themselves.  Analysing  some  of  these  reports  to  see  of 
what  the  assets  at  that  time  consisted,  we  find  that  the 


THE  CHARACTER  OF  THE  INVESTMENTS.         \\ 

Connecticut  Mutual  and  the  Mutual  Benefit,  two  of  the 
large  companies  of  the  fifties,  had  in  1851  fifty-six  per 
cent,  of  their  assets  consisting  of  premium  notes.  This 
percentage  of  notes  shows  well  the  manner  in  which  life 
insurance  was  then  conducted.  A  considerable  portion 
of  the  premium  was  received  in  the  shape  of  a  note 
given  by  the  policy-holder  and  bearing  interest.  As 
this  portion  of  the  premiums  came  to  the  companies  al- 
ready invested,  we  can  pass  over  this  asset  quickly  and 
see  how  that  portion  of  the  premium  which  came  to 
the  companies  in  cash  was  invested.  Of  the  net  in- 
vested assets  of  these  two  large  companies  fifty-nine 
per  cent,  was  invested  in  loans  on  real  estate.1  Half 
of  the  remaining  invested  assets  consisted  of  city  bonds 
and  bank  stocks,  and  half  of  cash.  At  the  end  of  1854, 
the  New  England,  the  Manhattan,  the  United  States, 
the  ISTew  York,  and  the  Mutual  Benefit  had  two-thirds 
of  their  net  invested  assets  consisting  of  mortgage  loans. 
The  decade  of  the  fifties  was  one  of  particularly 
sound  growth  in  the  new  business  of  life  insurance 
which  had  in  the  decades  just  preceding  proven  its  pos- 
sibilities. This  is  shown  by  the  decreasing  percentage 
which  premium  notes  formed  of  the  total  assets.  We 
have  seen  how  the  two  large  companies  earlier  in  the 
decade  had  three-fifths  of  their  assets  in  premium  notes. 

1  See  the  Assurance  Magazine,  Volume  III,  1853,  pages  45  and 
53. 


12         THE  CHARACTER  OF  THE  INVESTMENTS. 

In  1855,  these  two  with  five  others  had  premium  notes 
not  averaging  more  than  a  quarter  of  their  total  assets. 
The  invested  assets  were  getting  in  better  shape.  Of 
these  seven  companies,  eighty-five  per  cent,  of  their 
total  invested  assets  consisted  of  mortgage  loans.  The 
remaining  fifteen  per  cent,  was  composed  of  a  few  state 
and  city  bonds,  and  a  little  necessary  cash.  None  pos- 
sessed any  real  estate  at  all. 

In  1858,  the  four  big  companies  at  that  time,  the 
Mutual  of  New  York,  the  Mutual  Benefit,  the  Con- 
necticut Mutual,  and  the  New  York  had  only  twenty- 
one  per  cent,  of  total  assets  consisting  of  premium 
notes.  The  largest  company,  the  Mutual,  was  taking 
no  notes  at  all.  Eighty-eight  per  cent,  of  the  remain- 
ing assets  were  invested  in  mortgage  loans.  Two  of 
these  companies  did  possess  some  real  estate  by  the 
end  of  this  year. 

The  foregoing  percentages  indicate  in  general  the 
character  of  the  assets  during  the  period  1850-59.  The 
premium  note  during  the  early  part  of  the  decade 
formed  a  large  percentage  of  the  assets,  but  it  had -de- 
creased. Mortgage  loans  were  the  popular  invest- 
ment. The  striking  characteristic  of  the  period  is  the 
almost  entire  absence  of  corporation  securities.  To  be 
^  sure,  several  companies  owned  bank  stocks,  but  the  pro- 
portion  they   formed    of   the   total    assets   was    small. 

There  was  likewise  an  almost  entire  absence  of  pub- 


THE  CHARACTER  OF  THE  INVESTMENTS.  13 

lie  securities,  some  state  and  city  securities  alone  being  f/ 
found  among  the  assets.  The  four  large  companies, 
already  pointed  out,  with  nearly  thirteen  million  dol- 
lars of  assets  possessed  only  three  hundred  and  ten 
thousand  dollars  worth  of  such  securities.  The  New 
England  Mutual  owned  some  manufacturing  corpora- 
tion stocks  and  bonds,  and  some  railroad  securities,  and 
in  the  later  years  of  the  decade,  the  Connecticut  Mutual 
invested  in  some  railroad  securities.  Beyond  this,  such 
investments  had  scarcely  extended. 

Fortunately  the  period  after  1859  is  capable  of 
more  extended  treatment.  The  information  concerning 
the  assets  is  much  more  complete.  In  that  year,  the 
New  York  Insurance  Department  was  established  and 
immediately  began  the  policy  of  publishing  annually 
with  great  detail  the  assets  belonging  to  companies 
doing  business  in  that  state.  Massachusetts  was  doing 
much  the  same  thing.  Other  states  soon  adopted  the 
plan  and  from  these  various  reports  the  following  tables 
have  been  compiled  for  twenty-nine  companies.  So 
far  as  possible  statistics  go  back  to  1860,  but  all  of 
these  twenty-nine  largest  companies  of  the  present  time 
were  not  existing  in  1860,  and  some  existing  were 
doing  business  in  states  which  did  not  require  annual 
reports.  The  statistics  are  for  the  calendar  years  1860, 
1870,  etc.,  taking  the  conditions  on  December  31  of 
each  year. 


14         THE  CHARACTER  OF  THE  INVESTMENTS. 
DISTRIBUTION  OF  TOTAL  ASSETS. 


Kind  of  Assets. 

1860 

1870 

1880 

1890 

1900 

Cash  Items 

2.4 

3.1 

1.4 

6.9 

20.5 

.0 

20.5 

59.2 

2.7 

1.6 

3.1 

4.3 

5.3 

1.2 

10.8 

21.5 

.1 

21.6 

44.4 

3.5 

1.2 

9.1 

4.5 

1.0 

1.5 

7.0 

5.2 

.1 

5.3 

38.6 

12.4 

5.7 

8.7 

.0 

.3 

14.3 

23.4 

4.7 

.0 

.0 

4.7 

.4 

1.0 

.1 

.0 

1.5 

6.2 

4.2 

1.7 

.9 

6.8 

1.2 

1.6 

2.8 

41.0 

10.4 

4.6 

.9 

1.2 

.5 

6.6 

9.2 

21.2 

.6 

.4 

22.4 

2.3 

1.2 

.1 

.4 

4.0 

26.2 

4.3 

Deferred  and  Outstanding  Pre- 
miums   

1.7 

Accrued  Interest 

.9 

Total  Uninvested  Assets. 
Premium  Notes 

6.9 
.9 

Policy  Loans    

3.7 

T^otal  Notes  and  Loans . . . 
Mortgage  Loans 

4.6 

28.8 

Real  Estate 

9.0 

Collateral  Loans 

4.3 

U.S.  Bonds 

.4 

Foreign  Public  Bonds 

3.4 

State  Bonds 

.6 
2.2 
5.9 

.8 

1.5 

5.5 
16.1 

1.2 
.0 
.2 

1.4 
.4 

1.1 
.0 
.0 

1.5 

2.9 

.6 

County  and  Municipal  Bonds  . . 

Total  Public  Bonds 

Railroad  Bonds 

4.2 
8.6 

28.8 

Light  and  Water  Bonds 

1.7 

Miscellaneous  Bonds 

.1 

.9 

IT 

1.6 
.1 
.1 

2.3 

3.2 

1.7 

Railroad  Stocks 

32.2 
2.5 

Bank  and  Trust  Co.  Stock 

Light  and  Water  Co.  Stock. . . . 
Miscellaneous  Stock 

2.7 
.1 
.2 

Total  Stock 

Total  Corporation  Bonds 
and  Stocks 

5.5 
37.7 

We  have  for  the  purpose  of  this  study  selected 
twenty-nine  companies.  Of  these  twenty-nine  there 
are  sixteen  whose  asset  history  is  given  in  official  re- 
ports as  far  back  as  1860.  These  companies  were  be- 
coming important  financial  institutions  at  the  beginning 
of  the  Civil  War  period,  having  total  assets  of  some 
twenty-three  million  dollars. 

In  the  above  table  those  items  coming  first  might  be 


THE  CHARACTER  OF  THE  INVESTMENTS.  15 

designated  as  uninvested  assets.  One  of  the  most  im- 
portant items,  cash,  will  be  considered  at  length,  not 
because  of  the  proportion  which  the  amount  so  desig- 
nated forms  of  the  total  assets,  but  because  it  is  the  as- 
set which  has  been  mismanaged  to  a  great  extent.  Total 
assets  of  twenty-three  millions  in  1860  divided  by  six- 
teen gave  small  average  assets.  Each  company  had  to 
have  some  cash,  and  with  assets  thus  scattered,  we  would 
expect  to  find  cash  forming  a  high  percentage  of  the 
assets.  As  assets  increased  in  size,  and  individual  com- 
panies came  to  possess  more  than  did  all  in  1860,  we 
would  further  expect  to  find  the  proportion  of  cash  de- 
creasing. The  table  does  show  a  considerable  propor- 
tion of  cash  for  the  first  decade,  but  instead  of  decreas- 
ing, that  proportion  had  nearly  doubled  by  1870,  and 
since  then  despite  the  great  increase  in  the  assets  the 
proportion  of  cash  has  remained  practically  constant. 

In  theory,  this  cash  asset  consists,  first,  of  the  actual 
cash  kept  in  the  office  which  is  needed  by  the  company 
for  its  daily  transactions  such  as  death  claims,  pre- 
miums paid  at  home  office,  and  similar  expenses  and  in- 
come, the  outcome  of  each  day's  business.  Of  course 
this  amount  brings  in  no  revenue.  Again  the  amount  of 
money  needed  by  a  company  for  many  of  its  current 
expenses  may  be  deposited  in  a  bank  subject  to  check. 
These  bank  balances  bring  in  some  return.  The  third 
item  of  such  cash  assets  consists  of  money  awaiting  in- 


16  THE  CHARACTER  OF  THE  INVESTMENTS. 

vestment.  It  is  not  possible  to  invest  the  premium  re- 
serves as  soon  as  they  come  to  the  company,  nor  would 
it  always  be  wise  to  do  so.  The  loan  market  is  not 
favourable  at  all  times.  If  the  company  keeps  the  cash 
for  a  while,  it  may  be  able  to  make  an  investment  with 
a  higher  interest  return.  Instead  of  keeping  the  cash 
in  its  own  vaults,  it  is  usually  deposited  in  banks  and 
trust  companies  which  are  willing  to  pay  something 
for  the  temporary  use  of  it. 

Thus,  daily  business  needs  and  idle  funds  awaiting 
investment  require  cash  items.  This  is  the  explanation 
of  such  amounts.  The  policy  is  justifiable  on  the 
ground  that  by  making  deposits  the  interests  of  the 
policy-holders  are  best  served.  However,  the  theoretical 
explanation  of  such  assets  differs  widely  from  the  actual 
practice  of  a  number  of  companies.  If  deposits  are 
made  of  idle  funds  awaiting  a  more  favourable  oppor- 
tunity for  investment,  and  for  this  purpose  alone,  there 
ought  to  be  years  in  which  the  deposits  were  large  and 
others  in  which  they  were  small.  If  the  individual 
companies  are  examined,  this  condition  will  be  found 
to  exist  in  the  majority  of  companies,  but  there  are 
some  whose  amounts  of  cash  deposited  in  banks  and 
trust  companies  have  not  formed  less  than  six,  ten  and 
even  fifteen  per  cent,  of  their  total  assets,  not  for  a 
single  year  or  two  years,  but  for  even  twenty  consecu- 
tive years.     Such  large  deposits  cannot  be  explained  on 


THE  CHARACTER  OF  THE  INVESTMENTS.  17 

the  ground  that  they  consist  of  funds  awaiting  invest- 
ment. Therefore  other  reasons  must  be  sought  in  ex- 
planation of  this  item. 

It  is  sometimes  argued  that  deposits  are  made  in 
order  that  the  insurance  funds  may  be  invested  in  se- 
curities not  allowed  by  law.  The  legal  regulations  re- 
stricting the  insurance  companies,  it  is  further  argued, 
have  confined  them  so  narrowly  that  to  get  a  better  re- 
turn on  the  assets,  these  are  deposited  in  a  trust  com- 
pany which  is  not  hampered  in  its  investments.  On 
this  ground  the  deposits  could  be  justified.  Legal  regu- 
lation of  investments  has  gone  too  far  in  this  country, 
and  if  a  management  sees  that  it  can  obtain  a  higher 
rate  of  return  through  the  agency  of  the  trust  company 
it  is  justified  from  the  policy-holder's  standpoint.  The 
trust  company  does  invest  sometimes  in  undertakings 
involving  considerable  risk,  but  such  risk  is  ordinarily 
compensated  for  by  higher  interest  earnings.  This  jus- 
tification of  the  deposits  in  trust  companies  is  based  on 
the  idea  that  the  insurance  company  receives  the  higher 
interest  earnings,  the  reward  for  the  greater  risk  in- 
volved. However,  so  far  as  can  be  learned  the  perma- 
nent deposits  in  the  trust  companies  have  not  received 
as  high  a  rate  of  interest  as  have  the  invested  assets 
of  the  company  making  such  deposits,  and  thus  the  in- 
surance company  has  not  been  rewarded  for  its  risk 
nor  for  its  violation,  in  spirit  at  least,  of  the  law. 


18         THE  CHARACTER  OF  THE  INVESTMENTS. 

However,  it  is  argued  that  if  the  insurance  company 
owns  considerable  stock  in  the  trust  company,  it 
benefits  through  the  higher  dividends  on  that  stock  due 
to  the  insurance  deposits.  This  would  be  true  if  the 
insurance  company  owned  all  the  stock  of  the  trust 
company,  but  when  it  owns  only  a  portion  of  the  stock, 
it  is  scarcely  good  business  to  place  large  deposits  in 
a  corporation  in  order  that  that  corporation  may  pay 
high  dividends  on  capital  stock  of  which  only  a  part 
is  owned  by  the  depositor  who  contributes  the  money 
which  brings  the  large  dividends. 

The  reason  of  the  large  steady  cash  deposits  of  cer- 
tain of  seven  or  eight  companies  can  be  explained  on 
no  other  ground  than  the  close  affiliation  existing  in  too 
many  cases  between  the  officials  of  the  insurance  com- 
panies with  the  banking  or  trust  institutions.  Officials 
of  insurance  companies  have  been  financially  interested 
in  outside  institutions  and  have  used  the  money  of  the 
insurance  companies  to  make  these  other  enterprises  suc- 
cessful. The  other  institution  has  been  usually  a  trust 
company,  but  banks  have  been  used  for  securing  the 
same  end.  In  some  cases  the  officials  of  the  trust  com- 
pany are  officials  of  the  insurance  company,  in  other 
cases  in  addition  to  this  interest,  the  insurance  officials 
have  been  personal  owners  of  considerable  amounts  of 
the  capital  stock  of  the  institution  which  they  have 
favoured  with  the  deposit  of  funds  under  their  care. 


THE  CHARACTER  OF  THE  INVESTMENTS.  19 

It  would  be  impossible  to  determine  how  large  a  . 
percentage  the  cash  deposits  ought  to  form  of  the  total 
assets.  If  the  statement  of  the  real  object  of  such  de- 
posits is  correct,  the  percentage  would  be  a  fluctuating 
one.  In  times  of  high  prices  for  securities  considerable 
deposits  could  fitly  be  made  which  would  be  almost 
entirely  withdrawn  when  prices  of  securities  became 
lower.  There  are  companies  which  have  not  reported 
cash  assets  in  excess  of  two  per  cent,  of  total  assets  for 
many  years,  and  the  rate  of  investment  earnings  of 
these  companies  have  been  higher  than  of  those  com- 
panies with  large  deposits.  However,  that  amount 
should  be  left  to  the  officials  despite  the  demand  now 
for  legal  regulation  of  the  amount.  Undoubtedly  the 
policy-holders  have  suffered  because  of  the  large  de- 
posits of  certain  companies,  not  because  of  any  inherent 
defect  in  the  use  of  deposits  by  the  insurance  companies, 
but  because  some  managers  have  misused  a  legal  privi- 
lege. Here  is  an  admirable  example  of  the  difficulty 
encountered  in  the  legal  regulation  of  investments. 
The  right  to  make  deposits  in  banks  and  trust  com- 
panies is  a  valuable  one ;  when  used  by  managers  with 
the  purpose  of  getting  the  best  returns  possible  to  the 
participating  policy-holders,  it  is  of  considerable  im- 
portance. Managers  not  so  actuated  have  used  the 
privilege  to  secure  pecuniary  gains  for  themselves  or 
their  friends. 


20         THE  CHARACTER  OF  THE  INVESTMENTS. 

The  other  uninvested  assets  require  but  little  at- 
tention. Deferred  and  outstanding  premiums  formed 
too  large  a  proportion  of  the  assets  in  1860,  and  with 
the  great  increase  in  business  and  in  the  formation  of 
new  companies  which  took  place  in  the  later  sixties, 
there  were  companies  which  could  not  be  declared  sol- 
vent without  counting  in  the  amounts  of  deferred  and 
outstanding  premiums.  In  1869,  of  all  the  companies 
reporting  to  the  New  York  department,  ten  per  cent,  of 
their  assets  consisted  of  the  doubtful  sort,  deferred  and 
outstanding  premiums.1  In  1870,  there  were  seventy- 
one  companies  doing  business  in  New  York,  and  of 
these  there  were  twenty-three  in  the  perilous  position 
of  not  possessing  interest-bearing  securities  equal  to  the 
reserve  upon  their  outstanding  policies.2 

Such  companies  were  ill-prepared  to  enter  into  the 

long  and  severe  business  depression  which  ensued.     A 

number   of   the    companies   which   had    carried   large 

amounts  of  deferred  and  outstanding  premiums  failed. 

Most  of  the  others  rapidly  reduced  their  amounts  and 

since   1870,  deferred  and  outstanding  premiums  have 

not  formed  a  large  proportion  of  the  total  assets.     One 

company  alone  in  1900  carried  an  amount  of  this  form 

of  assets  sufficient  to  denote  a  marked  weakness  from 

the  asset  standpoint. 

1 T.   B.    Macaulay,  Transactions  of    the    Actuarial   Society, 
Volume  VIII,  Number  9,  page  29. 
8  Insurance  Journal,  Volume  VIII,  page  481. 


THE  CHARACTER  OF  THE  INVESTMENTS.         21 

Accrued  interest  has  not  formed  any  considerable 
percentage  of  the  total  assets  at  any  time.  With  the 
change  in  the  character  of  the  assets  from  mortgage 
loans  to  bonds  with  the  result  of  more  frequent  interest 
payments,  the  amount  of  accrued  interest  and  rents  has 
decreased.  As  a  result  we  would  find  that  the  total  un- 
invested assets  would  form  a  small  proportion  of  the 
total  assets  were  it  not  for  the  persistent  policy  of  sev- 
eral companies  to  keep  large  cash  deposits. 

Premium  notes  as  an  insurance  asset  possess  interest 
largely  from  a  historical  standpoint.  For  thirty  years 
after  the  successful  organisation  of  life  insurance  com- 
panies in  the  United  States,  the  plan  was  generally 
adopted  of  allowing  the  insured  to  pay  a  part  of  his 
premium  with  an  interest-bearing  note.  By  1869,  the 
climax  of  one  of  the  periods  in  life  insurance  history, 
nearly  one-third  of  the  assets  of  the  companies  consisted 
of  premium  notes.  It  is  not  necessary  to  consider  at 
length  the  premium  note  as  an  asset.  It  came  to  the  in- 
vestment department  of  the  companies  from  the  in- 
surance side  of  the  business.  As  an  asset,  premium 
notes  are  valuable  only  as  they  cancel  liabilities.  This  I 
they  can  do  so  long  as  the  notes  of  one  individual  do  not 
exceed  the  reserve  value  of  his  policy.  The  premium 
note  modifies  the  insurance  contract  so  as  to  get  the 
most  insurance  for  the  least  money.  For  all  essential 
purposes,  a  premium  note  policy  is  a  natural  premium 


22         THE  CHARACTER  OF  THE  INVESTMENTS. 

policy.  Just  as  the  natural  premium  system  has  proven 
unpopular,  so  the  note  system,  when  the  public  came  to 
understand  it,  fell  largely  into  disuse.  The  change  in 
the  character  of  insurance  hastened  the  change  from 
premium  notes  to  an  all-cash  basis.  In  the  sixties,  en- 
dowment policies  began  to  be  written  in  large  numbers 
for  the  first  time.  The  premium  note  system  which 
was  not  popular  with  full  payment  life  policies  became 
absurd  when  applied  to  endowment  and  limited  life 
policies.  In  1870,  one-third  of  the  companies  doing 
business  in  Massachusetts  were  receiving  no  new  pre- 
mium notes.1  Several  of  the  others  had  reduced  the 
maximum  credit  for  which  notes  were  allowed  from 
fifty  to  forty  per  cent,  of  the  premiums. 

The  objection  to  the  premium  note  system  is  well 
illustrated  by  the  experience  of  the  seventies.  The 
premium  note  policies  lapsed  in  great  numbers,  and  as 
a  result  of  this  and  the  determination  of  a  number  of 
the  companies  to  abandon  the  plan,  the  percentage  that 
such  notes  formed  of  the  total  assets  was  reduced  from 
twenty-one  in  1870  to  five  in  1880.  The  premium  note 
system  has  not  been  entirely  abandoned,  but  the  com- 
panies using  it  have  reduced  the  amount  of  credit  given, 
so  that  save  in  the  case  of  two  or  three  companies, 
premium  notes  at  present  form  an  inconsiderable  pro- 
portion of  total  assets. 

1  Massachusetts  Insurance  Report,  1870,  p.  XI. 


*~~THE  CHARACTER  OF  THE  INVESTMENTS.         23 

Closely  related  to  premium  notes  are  policy  loans. 
In  1860,  only  one  of  the  companies  under  survey  re- 
ported such  an  asset.  Ten  years  later,  nine  companies 
were  making  policy  loans,  only  one  however,  having 
enough  of  such  loans  to  form  any  considerable  propor- 
tion of  its  total  assets.  In  1880,  two  more  companies 
reported  policy  loans,  but  the  percentage  of  total  assets 
was  still  small.  By  1890,  the  plan  of  making  loans 
with  the  policies  as  security  began  to  be  popular. 
Twenty  companies  had  adopted  the  practise  of  making 
such  loans.  In  the  fierce  competition  to  secure  large 
amounts  of  insurance  which  took  place  during  the  nine- 
ties every  company  of  the  twenty-nine,  save  two, 
granted  the  privilege  to  policy-holders  of  making  loans 
from  their  policy  reserves.  With  most  companies,  a 
provision  began  to  be  inserted  in  the  policy  contracts 
concerning  such  loans.  Policy-holders  have  taken  ad- 
vantage of  the  privilege  granted  them,  and  in  1900 
policy  loans  formed  nearly  four  per  cent,  of  the  total 
assets  of  the  companies,  and  in  1904  more  than  seven 
per  cent. 

The  point  to  be  remembered  about  policy  loans  is  that, 
like  premium  notes,  they  are  an  asset  not  sought  by  the 
men  in  charge  of  the  assets,  but  come  to  the  companies 
through  conditions  expressed  in  the  policy.  Therefore 
the  amount  which  such  loans  will  form  depends  upon 
conditions  not  under  the  control  of  the  investment  man- 


24         THE  CHARACTER  OF  THE  INVESTMENTS. 

ager.  As  a  result  the  question  has  been  raised  whether 
this  provision  in  every  policy  for  loans  will  not  some- 
time cause  trouble  to  the  companies.  It  has  been  sug- 
gested that  during  a  financial  depression  this  provision 
will  be  taken  advantage  of  by  so  many  policy-holders 
that  companies  might  be  embarrassed  for  cash.  With 
their  assets  tied  up  in  long  time  securities,  and  the 
market  for  such  depressed,  such  a  situation  would  be 
serious.  However,  companies  which  had  a  provision  for 
loans  in  their  policies  during  the  nineties  did  not  suffer 
any  serious  increase  in  the  demand  for  policy  loans. 
English  companies  have  been  making  such  loans  for 
half  a  century  without  experiencing  the  difficulty  which 
has  been  suggested.1  The  rate  of  interest  charged  for  , 
policy  loans  should  not  be  stipulated  in  the  policy.  So  ' 
far  during  the  history  of  such  loans  such  a  course  has 
seemed  wise  in  view  of  the  constantly  decreasing  rate  of 
interest.  The  rate  of  interest  may  change,  and  with  a 
rate  stipulated  in  the  policy  near  to  the  market  rate,  or 
under,  the  amount  of  such  loans  might  increase  too 
much. 

As  an  investment,  the  security  of  policy  loans  is  un- 
questioned. Likewise  the  rate  of  interest  has  been  good, 
for  the  companies  have  placed  it  higher  than  the  rate 
which  they  have  been  earning  on  their  other  assets. 

1  See  Assurance  Magazine  1858,  Volume  VII,  page  251,  and  the 
Insurance  Spectator  1893,  Volume  51,  page  268. 


THE  CHARACTER  OF  THE  INVESTMENTS.         25 

The  serious  objection  to  such  loans  lies  in  the  fact  that 
they, like  premium  notes. modify  the  insurance  contract. 
The  interest  upon  the  loan  added  to  the  yearly  pre- 
mium for  insurance  makes  the  annual  payment  burden- 
some. Default  of  premium  therefore  is  more  likely  to 
occur.  As  this  is  an  objection  from  the  insurance  stand- 
point, not  from  the  investment  point  of  view,  it  can 
well  be  passed  over.  Policy  loans  ought  not  to  absorb 
a  much  larger  proportion  of  the  assets 'than  at  present. 
Policy-holders  will  learn  that  by  borrowing  their  re- 
serves, they  defeat  the  purpose  of  their  insurance  and 
will  not  want  such  loans. 

So  far  the  assets  which  have  been  considered  have 
been  of  a  peculiar  character.  Cash,  deferred  premiums, 
accrued  interest,  premium  notes,  and  policy  loans  do 
not  come  to  the  company  through  any  plan  of  the  invest- 
ment department.  With  the  assets  now  to  be  con- 
sidered, the  proportion  which  they  form  of  the  total 
assets  is  in  a  large  degree  the  result  of  definite  action 
on  the  part  of  those  in  charge  of  the  assets  of  the  com- 
panies. 

It  was  seen  that  during  the  decade  1850-60  mortgage 
loans  formed  the  bulk  of  the  assets.  In  view  of  the 
changes  which  have  later  taken  place  in  the  character 
of  the  assets,  it  is  claimed  that  mortgages  were  the  only 
outlet  for  the  funds,  that  corporation  securities  were  too 
scarce  to  absorb  much  insurance  capital  at  that  time. 


26         THE  CHARACTER  OF  THE  INVESTMENTS. 

It  is  true  that  corporation  securities  were  scarce  at  that 
time  compared  with  the  present,  but  it  must  be  remem- 
bered that  the  funds  to  be  invested  were  extremely  small 
compared  with  the  present.  The  fifteen  companies 
which  we  are  considering  did  not  have  two  billion  dol- 
lars to  invest  in  1860,  they  had  less  than  a  million  dol- 
lars apiece  to  place  at  interest. 

With  small  assets  in  1860,  the  officials  of  the  com- 
panies invested  their  funds  in  mortgage  loans.  The 
table  of  totals  shows  that  fifty-nine  per  cent,  of  the  total 
assets  were  so  invested  at  the  end  of  the  decade  of  the 
fifties.  If  only  that  part  of  the  assets  is  considered 
which  we  have  designated  as  invested  assets  it  will  be 
found  that  more  than  four-fifths  of  that  amount  con- 
sisted of  mortgage  loans.  By  1864,  the  value  of  the 
mortgages  held  by  companies  doing  business  in  New 
York  had  absolutely  decreased  two  million  dollars,  de- 
spite the  increase  in  the  amount  of  total  assets  during 
the  intervening  four  years.  Mortgages  in  that  year 
formed  less  than  half  the  percentage  of  invested  assets 
that  they  did  in  1860.  The  reason  for  this  remarkable 
change  in  the  character  of  the  assets  lies  in  the  Civil 
War.  The  United  States  debt  increasing  so  enormously, 
and  the  greenback  issues  deranging  prices,  the  govern- 
ment bonds  could  be  purchased  at  a  price  which  yielded 
a  rate  of  interest  in  paper  as  high  as  ten  per  cent.  The 
companies  put  practically  all  their  available  funds  into 


THE  CHARACTER  OF  THE  INVESTMENTS.         27 

the  purchase  of  the  public  securities.  The  investments 
in  government  bonds  rose  with  the  premium  on  gold 
and  declined  with  the  disappearance  of  that  premium. 

Interest  had  been  rising  before  the  Civil  War.  Dur- 
ing the  war  it  rose  rapidly  not  only  on  government 
loans,  but  on  all  loans.  When  the  premium  on  gold 
began  to  decrease,  and  the  interest  in  paper  on  such 
securities  fell,  the  insurance  companies  again  sought 
mortgages  on  real  estate  for  the  investment  of  the  re- 
serves. Before  the  outbreak  of  the  war  the  development 
of  the  Middle  West  had  demanded  large  sums  of  capi- 
tal, the  rate  of  interest  offered  for  capital  was  high,  but 
Eastern  capital  was  suspicious.  Connecticut  had  not 
restricted  her  companies  in  regard  to  investments  in 
mortgages,  and  by  1862  several  Connecticut  companies 
had  considerable  loans  in  Ohio  and  Illinois.1  The 
Union  Mutual  likewise  was  loaning  money  on  Illinois 
real  estate.  The  New  York  companies  not  only  were 
forbidden  by  state  law  to  loan  in  the  West,  but  in  every 
state  except  New  York.  This  New  York  statute  caused 
much  discussion  both  in  the  East  and  in  the  West. 
However,  whether  through  loans  in  the  East  or  in  the 
West,  mortgage  loans  increased  in  proportion  to  total 
assets  after  1864. 

Mortgage  loans  continued  to  increase  both  absolutely 
and  relatively.     So  far  the  companies  had  found  no 

1  New  York  Insurance  Report,  1863. 


28         THE  CHARACTER  OF  THE  INVESTMENTS. 

outlet  for  their  funds  so  suitable  as  loans  on  real  estate 
when  government  bonds  were  not  to  be  had  at  a  low 
price.  For  the  companies  as  a  whole  this  relative  in- 
crease in  mortgage  loans  continued  until  1875,  the  ab- 
solute increase  continued  one  year  later,  and  then  mort- 
gages not  only  declined  relatively  but  in  absolute 
amount.  It  was  nine  years  after  1876  before  the  life 
insurance  companies  again  possessed  as  many  mortgage 
loans  as  they  did  in  that  year. 

The  New  York  companies  first  began  to  decrease  the 
amount  of  their  mortgage  loans.  In  1875,  the  Equi- 
table had  seventeen  million  dollars  invested  in  real  estate 
loans,  in  1880  it  had  nine  million.  The  New  York 
Life  dropped  from  seventeen  millions  in  1875  to  four- 
teen millions  in  1878.  The  Mutual,  the  early  big  com- 
pany, which  had  almost  from  its  incorporation  placed 
all  its  available  funds  in  mortgage  loans,  decreased  its 
holding  of  such  assets  seven  million  dollars  during 
these  Hive  years.  In  fact  during  the  last  half  of  the 
decade  of  the  seventies  every  New  York  company  ex- 
cept the  Washington  decreased  the  amount  of  its  loans 
on  real  estate  security. 

The  cause  of  this  change  in  the  character  of  the 
assets  lay  in  the  depreciation  in  real  estate  values 
which  set  in  with  especial  violence  in  New  York  during 
1874,  1875  and  1876.  Before  the  panic  of  1873,  there 
had  been  much  speculation  in  land  values  especially  in 


THE  CHARACTER  OF  THE  INVESTMENTS.         29 

New  York  City.  When  the  depression  in  values  came 
on  values  decreased  to  such  an  extent  that  a  considerable 
part  of  the  property  mortgaged  could  not  be  sold  for 
the  fifty  per  cent,  of  its  former  value,  the  percentage 
to  which  the  companies  had  loaned  upon  it.1  Fore- 
closure was  avoided  as  much  as  possible,  but  much 
real  estate  came  into  the  possession  of  the  companies. 

The  companies  of  states  which  were  allowed  to  invest 
in  mortgages  outside  of  their  own  home  state  did  not 
suffer  so  quickly  from  the  depression  in  values  as  did 
New  York  companies  which  were  restricted  to  New 
York.  The  Connecticut  companies  continued  to  in- 
crease the  amount  of  their  mortgage  loans  during  the 
period  1874-76  when  the  depression  was  the  most  severe 
in  New  York.  The  Aetna,  the  Connecticut  Mutual  and 
the  Phoenix  increased  their  mortgage  loans  through 
1875,  1876,  and  1877.  However,  as  the  depression  in 
values  spread  each  one  was  forced  to  foreclose  mort- 
gages to  a  greater  or  less  extent,  and  each  of  these  three 
companies  possessed  smaller  amounts  of  mortgage  loans 
in  1880  than  they  did  in  1877.  The  Aetna  which  had 
placed  a  great  part  of  its  loans  on  small  amounts  on 
farm  property  did  not  suffer  much,  but  the  Connecticut 
Mutual  which  had  loaned  large  amounts  on  city  property 
had  quite  a  different  experience.    In  1877  the  company 

1  The  Insurance  Spectator,  1876,  Volume  17,  page  585. 


30         THE  CHARACTER  OF  THE  INVESTMENTS. 

had  sixty  per  cent,  of  its  assets  invested  in  mortgage 
loans,  a  large  part  of  which  had  been  made  in  the  West. 
It  was  charged  at  that  time  that  many  of  these  loans 
had  been  made  without  regard  for  the  safety  of  the 
company.1  At  any  rate  the  company  was  forced  to 
begin  foreclosing  mortgages  upon  a  large  scale  in  1879, 
a  process  which  continued  until  it  became  the  possessor 
of  thirteen  million  dollars  worth  of  real  estate  obtained 
through  foreclosure.  It  had  iive  millions  in  Chicago, 
three  millions  in  St.  Louis,  and  nearly  two  millions  in 
Detroit. 

The  Union  Mutual  which  had  loaned  a  large  percent- 
age of  its  assets  in  the  West  likewise  was  forced  to 
foreclose  a  large  percentage  of  its  mortgage  loans.  In 
1875,  it  had  five  and  one-half  million  dollars  worth  of 
mortgage  loans,  in  1880  it  had  only  one  and  one-half 
million  dollars  worth.  At  the  close  of  the  latter  year 
it  owned  one  and  one  half  million  dollars  worth  of  real 
estate  in  Illinois  alone. 

The  table  of  totals  shows  that  mortgage  loans  in  1880 
formed  but  thirty-eight  per  cent  of  the  total  assets, 
whereas  in  1860  they  had  formed  fifty-nine  per  cent. 
The  cause  for  this  change  has  been  stated.  It  is  the 
history  of  this  period  to  which  investors  often  point  as 
illustrating  the  weakness  of  loans  on  real  estate  as  an 

1  Insurance  Monitor  1880,  page  36. 


THE  CHARACTER  OF  THE  INVESTMENTS.         31 

asset.  Some  companies  did  fail  because  they  had  loaned 
rashly  on  real  estate,  but  they  were  badly  managed  in 
other  respects.  The  companies  which  survived  had  one 
lesson  pointed  out  to  them.  The  actual  loss  on  the 
foreclosed  property  was  not  large  to  those  companies 
which  kept  the  real  estate  until  the  revival  in  business 
set  in,  but  the  loss  to  the  companies  in  other  ways  from 
foreclosure  was  great.  The  depreciation  in  securities 
as  good  as  United  States  bonds  was'  greater  probably 
than  the  depreciation  in  land  values,  but  the  companies 
owning  marketable  securities  knew  exactly  what  the 
value  of  such  securities  were  and  the  public  could  find 
out.  The  companies  which  had  obtained  a  large 
amount  of  real  estate  could  only  estimate  its  value,  for 
much  of  it  had  scarcely  a  market  price,  and  the  public 
could  not  learn  what  the  value  was.  Hence,  there  was 
a  loss  of  prestige  to  certain  companies,  and  the  criticism 
which  followed  was  extremely  severe. 

Foreclosure  of  mortgage  loans  ceased  almost  entirely 
after  1881.  Later  they  began  to  absorb  a  larger  pro- 
portion of  the  accumulated  assets.  Since  then  the  total 
amount  of  such  loans  has  increased  steadily,  but  in  com- 
parison with  the  increase  in  total  assets  the  mortgage 
loans  have  declined  in  importance.  At  the  present  time 
mortgage  loans  form  barely  more  than  one-fourth  of  the 
total  assets.  With  individual  companies  the  decline  in 
percentage  of  such  assets  is  still  more  striking.     With 


32         THE  CHARACTER  OF  THE  INVESTMENTS. 

some  companies  in  1904  the  percentage  which  loans 
on  real  estate  formed  of  the  total  assets  was  under 
fifteen  per  cent. 

The  cause  for  the  extreme  relative  decline  which  has 
taken  place  in  mortgage  loans  since  1890  is  hard  to 
explain.  There  has  been  a  decline  in  the  earning  rate 
of  such  loans,  but  it  has  not  been  enough  to  justify  the 
change  from  mortgage  loans  as  the  greatest  asset  to  a 
lower  position  among  the  assets.  Mortgages  run  for 
short  periods,  and  with  a  decline  in  the  interest  rate 
they  are  paid  off.  After  1890  the  rate  of  interest  de- 
clined sharply,  and  as  a  result  most  of  the  companies 
seem  to  have  been  animated  with  a  desire  to  get  the 
funds  under  their  control  invested  in  long  time  securi- 
ties. Other  causes  for  the  change  will  develop  in  the 
study  of  the  other  investments. 

Real  estate  absolutely  owned  by  the  insurance  com- 
panies may  be  divided  into  two  classes.  One  class  con- 
sists of  real  estate  obtained  through  foreclosure,  the 
other  of  that  purchased  and  improved  by  the  companies 
for  business  purposes,  namely  for  home  offices.  The 
first  class  has  never  composed  a  large  part  of  the  assets 
save  at  the  close  of  the  seventies  through  causes  which 
have  already  been  discussed.  In  1880,  as  a  result  of 
the  foreclosed  mortgages,  real  estate  formed  more  than 
twelve  per  cent,  of  the  assets.  Not  a  few  companies 
had  a  fifth  or  more  of  their  assets  tied  up  in  real  estate. 


THE  CHARACTER  OF  THE  INVESTMENTS.         33 

Since  1880,  there  has  been  no  period  of  general  fore- 
closure of  mortgages. 

In  the  late  sixties,  several  companies  were  erecting 
home  office  buildings.  For  advertising  purposes,  these 
buildings  were  made  showy  and  expensive.  From  that 
time  until  the  present  practically  every  life  insurance 
company,  no  matter  how  meager  its  assets,  and  how 
necessary  it  has  been  that  those  assets  should  be  in- 
vested with  the  greatest  care,  has  deemed  it  necessary 
for  its  success  that  it  should  erect  an  office  building. 
Each  new  building  must  be  larger  and  more  costly  than 
the  preceding  ones.  Those  companies  which  have  had 
other  weak  elements  in  their  management  have  been 
ruined  by  the  heavy  burden  of  a  costly  home  office,  and 
in  a  number  of  cases  these  magnificent  buildings  stand 
not  as  monuments  of  strength,  but  rather  as  tombstones 
to  departed  companies.  Most  of  the  companies  which 
built  the  home  offices  were  strong  enough  to  afford  the 
heavy  expenses  entailed  in  most  cases  by  such  buildings. 
Probably  one  hundred  and  twenty-five  million  dollars 
are  invested  today  in  home  office  structures  or  branch 
offices,  which  from  the  investment  point  of  view  is  a 
failure.  It  is  the  money  placed  on  such  buildings  that 
has  kept  real  estate  up  to  such  a  large  proportion  of  the 
assets.  This  policy  of  erecting  expensive  offices  is  not 
common  to  all  corporations.  Several  years  ago  the 
banks  started  to  follow  the  example  of  the  insurance 
3 


34         THE  CHARACTER  OF  THE  INVESTMENTS. 

companies,  but  experience  soon  taught  them  that  bank- 
ing was  one  business  and  the  handling  of  real  estate 
another.  Outside  of  the  metropolitan  newspaper  offices, 
few  corporations,  other  than  insurance,  have  invested 
so  heavily  in  offices  when  the  real  needs  of  the  business 
required  but  little.  It  is  necessary  to  state  in  this  con- 
nection that  two-thirds  of  the  real  estate  owned  by  the 
twenty-nine  largest  companies  is  in  the  possession  of 
five  of  them. 

Collateral  loans  formed  a  small  percentage  of  the 
total  assets  until  1880.  By  reference  to  the  table,  it 
will  be  seen  that  nearly  six  per  cent,  of  the  assets  of 
that  year  were  in  the  shape  of  temporary  loans  upon 
collateral  security.  However,  this  was  not  the  result 
of  any  general  action  of  the  companies,  for  of  the 
twenty-four  million  dollars  of  collateral  loans  in  1880, 
fifteen  millions  were  held  by  two  New  York  companies, 
and  nineteen  millions  by  four  companies  of  that  State. 

The  cause  for  such  large  loans  on  collateral  by  the 
New  York  companies  was  ascribed  to  the  law  limiting 
mortgage  loans  to  New  York,  but  since  the  repeal  of 
that  law,  collateral  loans  have  continued  to  form  a  con- 
siderable portion  of  the  assets  of  some  companies  in 
that  State.  In  1890,  the  Manhattan  reported  forty  per 
cent,  of  its  assets  as  consisting  of  collateral  loans.  In 
1900,  two  New  York  companies  had  thirty-seven  mil- 
lion dollars  so  invested,  or  more  than  one-half  of  the 


THE  CHARACTER  OF  THE  INVESTMENTS.         35 

total  of  collateral  loans  held  by  all  companies.  How- 
ever, some  companies  in  other  states  have  at  the  present 
time  a  larger  proportion  of  their  assets  so  invested  than 
do  most  of  the  New  York  companies.  Just  why  the 
companies  should  take  up  such  loans  which  are  properly 
the  function  of  a  commercial  bank  is  difficult  to  under- 
stand. The  rate  Of  interest  realized  upon  such  loans 
is  low,  they  require  a  great  deal  of  attention  which 
could  well  be  directed  in  other  channels,  and  there  is 
no  need  of  ready  money  calling  for  such  investments  on 
the  part  of  the  life  insurance  corporations. 

United  States  bonds  need  but  little  discussion  in  a 
study  of  the  assets.  Only  for  a  brief  period  did  they 
form  any  considerable  portion  of  the  total  assets.  The 
insurance  funds  were  not  large  during  the  Civil  War 
period,  but  it  is  remarkable  how  suddenly  the  invest- 
ments were  changed  from  mortgage  loans  to  United 
States  bonds.  With  the  disappearance  of  the  premium 
on  gold,  the  government  bonds  owned  by  the  insurance 
companies  decreased.  The  severe  depression  of  the 
seventies  so  alarmed  the  companies  that  they  purchased 
considerable  amounts  of  such  bonds,  despite  the  fact 
that  the  government  was  refunding  them  at  a  lower 
rate  of  interest.  At  the  close  of  1880  the  companies 
owned  twice  the  amount  of  government  bonds  that 
they  did  in  1870.  For  reasons  generally  known,  since 
1880,  United  States  bonds  have  been  getting  scarcer 


36         THE  CHARACTER  OF  THE  INVESTMENTS. 

and  higher  priced,  and  the  insurance  companies  have 
disposed  of  such  bonds  until,  at  the  present  time, 
government  bonds  are  scarcely  more  than  a  temporary 
investment  for  funds  awaiting  investment. 

Under  the  title  of  foreign  public  bonds  there  has 
been  included  bonds  of  foreign  governments,  bonds  of 
cities  in  foreign  countries,  and  corporation  bonds 
guaranteed  by  the  government  of  the  foreign  countries. 
Such  an  item  was  not  found  among  the  assets  of  United 
States  companies  until  about  1880.  At  the  end  of 
that  year,  the  Travelers'  owned  something  like  forty- 
seven  thousand  dollars  of  Montreal  bonds.  By  1890, 
nine  companies  possessed  some  amount  of  foreign  pub- 
lic bonds,  and  these  included  securities  guaranteed  by 
European  governments.  The  appearance  of  these 
foreign  bonds  among  the  assets  of  United  States  com- 
panies does  not  indicate  that  they  found  it  necessary 
to  go  abroad  for  remunerative  investments.  Some  of 
the  Canadian  bonds  probably  have  been  purchased  as 
an  investment,  but  the  most  of  these  and  practically 
all  of  those  of  other  countries  have  been  purchased  as  a 
result  of  the  requirement  of  foreign  governments  that 
the  reserves  upon  policies  written  in  those  countries 
shall  be  invested  in  securities  of  that  country.  Several 
companies  began  to  do  a  large  foreign  business  during 
the  eighties.  This  business  has  increased  until  at 
present    several    companies    have    large    holdings    of 


THE  CHARACTER  OF  THE  INVESTMENTS.  37 

foreign  public  bonds.  The  Germania  in  1900  had  fif- 
teen per  cent,  of  its  assets  invested  in  foreign  securities, 
the  New  York  Life  had  ten  per  cent.  The  objection  to 
such  investments,  aside  from  the  fact  that  the  European 
bonds  usually  bear  a  low  rate  of  interest,  lies  in  the 
further  requirement  by  the  foreign  government  that  the 
securities  be  also  deposited  in  those  countries.  The 
scattering  of  assets,  not  only  of  bonds,  but  of  real  estate, 
in  various  countries  is  a  bad  plan.  1*0  secure  the  best 
management  of  the  assets,  their  control  should  be  con- 
centrated in  the  home  office. 

For  a  time  in  the  history  of  the  country  state  bonds 
existed  in  large  amounts.  This  was  during  the  period 
1825  to  1840,  when  the  states  conceived  and  carried 
out  to  a  considerable  extent  large  systems  of  internal 
improvements.  Then  came  the  crisis  of  1837,  followed 
by  state  bankruptcy  and  repudiation  of  debts.  Since 
1840,  twelve  states  have  dishonored  debts  to  a  total 
amount  of  three  hundred  million  dollars.  From  the 
same  date  state  activity  requiring  large  sums  of  capital 
has  almost  ceased.  When  in  1850-60,  state  bonds  could 
have  been  purchased  by  the  insurance  companies,  they 
were  not  desired;  since  that  decade  the  bonds  of  states 
with  a  good  record  for  paying  have  been  too  scarce  to 
offer  much  outlet  for  investments. 

As  the  states  gave  up  internal  improvements,  the 
counties  and  cities  increased  their  activities.     Counties 


38         THE  CHARACTER  OF  THE  INVESTMENTS. 

made  large  bond  issues  to  subsidize  railroads,  and  mun- 
icipalities did  the  same.  This  created  large  debts  for 
these  governments,  and  the  insurance  companies  bought 
many  bonds.  In  1880  nearly  one-seventh  of  the  total 
assets  were  invested  in  such  securities.  Then  like  the 
states,  the  counties  and  cities  began  to  repudiate  their 
debts  on  a  large  scale.  Over  one  hundred  cities  in  Illi- 
nois 1  alone  endeavored  to  avoid  payment  of  their 
bonds,  more  than  ninety  in  Missouri  attempted  the 
same  policy,  and  in  some  states,  there  was  almost  unan- 
imous action  on  the  part  of  the  municipalities  in  at- 
tempting to  dishonor  their  obligations. 

As  a  result,  the  insurance  companies  decreased  abso- 
lutely their  holdings  of  municipal  securities  from  1880 
to  1890.  Since  then  there  has  been  an  enormous  in- 
crease in  the  debts  of  municipalities,  but  the  security 
of  such  bonds  has  increased  even  more  rapidly.  This 
has  caused  these  bonds  to  be  sought  by  investors  who 
are  satisfied  with  a  low  rate  of  interest  so  long  as  the 
security  is  good,  and  given  them  a  price  in  many  cases 
prohibitive  to  insurance  companies.  Though  the  in- 
surance companies  possess  more  municipal  securities 
than  ever  before,  the  percentage  which  they  form  of 
total  assets  has  diminished. 
/  So  far,  the  great  changes  which  have  been  noted  in 
the  character  of  the  assets  have  been  large  relative  de- 

1  Insurance  Monitor,  1884,  page  510. 


THE  CHARACTER  OF  THE  INVESTMENTS.         39 

creases  in  premium  notes,  in  mortgage  loans,  and  since 
1880  a  decrease  in  public  securities.  Corporation  se- 
curities on  the  other  hand  have  absorbed  a  rapidly  in- 
creasing proportion  of  the  assets.  From  less  than  one 
per  cent,  of  twenty  million  dollars  of  assets  in  1860  in- 
vested in  corporation  bonds,  the  percentage  has  grown 
in  1900  to  thirty-two  per  cent,  of  nearly  two  billion 
dollars  worth  of  assets.  Of  these  corporation  bonds, 
railroad  securities  form  by  far  the'  largest  amount. 
There  were  plenty  of  railroad  securities  in  1860,  a 
great  deal  more  in  proportion  to  the  insurance  assets 
than  at  the  present  time.1  However,  only  six  com- 
panies had  such  an  asset  at  all.  In  1870,  three  more 
companies  owned  railroad  bonds,  but  it  was  not  until 
after  1880  that  insurance  companies  began  to  invest 
large  amounts  in  railroad  bonds.  During  the  early 
period  railroad  securities  were  not  considered  safe 
enough  for  insurance  companies.  Railroads  had 
scarcely  passed  through  the  experimental  period  of  their 
development  when  they  fell  into  speculative  control. 
Men  obtained  control  of  them  simply  to  exploit  them 
and  wreck  them  for  their  own  pecuniary  gain.  Thou- 
sands of  dollars  of  savings  invested  in  railroad  secur- 
ities were  lost.     During  this  period  the  insurance  com- 

1  The  report  of  the  Secretary  of  the  Treasury  in  1857  gives 
the  capital  and  indebtedness  of  the  railroads  for  that  year  as 
$900,000,000. 


if 


40         THE  CHARACTER  OF  THE  INVESTMENTS. 

panies  avoided  railroad  bonds  and  stocks.  Better  days 
came  to  the  railroads,  their  bonds  became  high-priced 
securities,  and  the  life  companies  have  purchased  them 
until  now  they  are  the  largest  asset  which  they  pos- 
sess. 

Within  the  last  two  decades  bonds  of  gas,  electric  and 
water  companies  have  been  purchased  to  some  extent. 
Gas  company  and  water  company  bonds  form  the  larg- 
est part  of  the  twenty-nine  millions  so  invested.  There 
is  a  similar  amount  consisting  of  miscellaneous  bonds 
of  telephone  and  telegraph  companies,  and  a  very  few 
bonds  of  manufacturing  concerns. 

The  investment  in  corporation  stock  is  one  of  the 
most  interesting  of  the  assets.  This  interest  comes  not 
from  the  proportion  which  such  securities  form  of  the 
total  assets,  but  because  of  the  results  which  follow  from 
the  ownership  of  stock.  Railroad  stock  has  increased 
slowly  as  an  asset.  The  objections  which  applied  to 
railroad  bonds  for  many  years,  applied  to  the  stock  with 
still  greater  force.  To-day  many  railroad  stocks  are 
better  investments  than  numerous  railroad  bonds. 

Of  other  stocks,  those  of  banks  are  the  only  ones 
held  to  any  considerable  extent  by  insurance  companies. 
In  1860,  it  was  the  New  England  companies  which 
held  practically  all  the  bank  stock  then  owned.  Only 
one  New  York  company,  the  New  York  Life,  owned 
any  at  all.     The  relative  amount  decreased  until  1880, 


THE  CHARACTER  OF  THE  INVESTMENTS.         4J 

but  in  the  last  decade  the  holdings  of  bank  stock  have 
increased  rapidly. 

There  are  serious  objections  to  stock  ownership  by 
life  companies.  The  stockholders  of  a  corporation  are 
responsible  for  the  management  of  that  corporation. 
Every  stockholder  is  part  owner,  thus,  in  buying  stock, 
the  insurance  company  becomes  more  than  the  trustee 
of  funds,  it  must  enter  to  some  degree  into  the  active 
work  of  control.  If  the  amount  of  stock  which  is  pur- 
chased be  but  a  small  part  of  the  total  capital  stock  of 
the  corporation  issuing  it,  the  responsibility  which  the 
insurance  company  assumes  is  slight,  and  may  be  under- 
taken for  the  sake  of  the  gain  which  may  accrue  from 
such  ownership.  However,  when  so  much  stock  is 
owned  of  one  corporation  that  to  protect  the  interest  of 
the  policy-holders  the  insurance  company's  officials  must 
become  directors  and  even  officials  in  other  concerns,  the 
result  is  disastrous  to  efficient  management  of  the  insur- 
ance company.  To  avoid  this  result  several  states  have 
prohibited  their  companies  from  holding  stock  of  other 
corporations. 

There  are  other  objections  t  o  stock  investments. 
Under  the  present  state  laws,  it  is  almost  vitally  neces- 
sary that  the  companies  maintain  assets  equal  at  all 
times  to  the  reserve  value  of  their  policies.  The  fluct- 
uating character  of  stock  values  is  well  known.  There- 
fore if  an  insurance  company  is  to  own  such  stock,  it 


42         THE  CHARACTER  OF  THE  INVESTMENTS. 

is  necessary  for  it  to  have  a  large  surplus,  and  large 
surpluses  are  undesirable,  because  they  lead  to  ex- 
travagances. If  the  states  would  change  the  laws  re- 
garding the  valuation  of  the  assets,  stock  might  be  pur- 
chased to  a  greater  extent.  The  valuation  legally 
adopted  by  most  of  the  states  takes  the  selling  price  on 
December  thirty-first  as  the  value  of  the  assets.  This 
has  made  stock  holding  dangerous  as  well  as  leading  to 
other  troubles.  Massachusetts  tried  the  plan  of  valuing 
the  assets  according  to  the  interest  value  method.  The 
value  of  each  security  was  arrived  at  by  capitalizing 
the  income  from  that  security  on  a  four  per  cent,  basis. 
The  plan  was  not  just  and  has  been  abandoned.  Some 
average  valuation  method  is  needed.  The  period  over 
which  the  average  extends  ought  to  be  of  five  years  or 
even  more.  This  would  equalize  values  and  prevent 
that  alternate  shrinkage  and  expansion  of  the  surplus 
of  companies  which  is  objectionable.  In  truth,  it 
would  enable  the  companies  to  get  along  with  a  small 
surplus,  for  by  taking  a  five-year  average  valuation, 
the  dangers  due  to  sudden  fluctuations  would  be 
avoided.  Such  a  change  in  the  law  is  to  be  hoped  for, 
as  it  would  make  possible  a  smaller  surplus;  and  if  a 
company  were  ably  and  honestly  managed,  would  enable 
it  to  invest  in  securities  which  bring  in  a  higher  in- 
terest return  than  those  now  owned. 

This  concludes  the  general  survey  of  the  assets.     The 


THE  CHARACTER  OF  THE  INVESTMENTS.         43 

tendencies  toward  different  classes  of  investments  dur- 
ing certain  periods  have  been  pointed  out,  and  the  main 
reasons  external  to  the  companies  indicated  which  ex- 
plain these  tendencies.  Similar  tables  computed  foi 
the  individual  companies  show  that  the  changes  have 
not  been  universally  made.  The  personal  element  has 
entered  largely  in  the  character  of  the  assets  which  a 
company  purchases.  Thus,  such  variations  are  found 
as  eighty  per  cent,  of  assets  in  mortgages  in  one  com- 
pany, and  ten  per  cent,  in  another.  One  company  has 
forty-five  per  cent,  of  its  assets  in  corporation  bonds, 
another  has  none.  To  explain  these  differences  one 
would  need  to  consider  the  personnel  of  the  individual 
management,  for  in  general,  the  same  opportunities  are 
open  at  the  present  time  to  all  the  companies.  Com- 
panies located  in  the  same  city  vary  widely.  Neither 
is  the  variation  due  to  size  alone,  for  although  the  three 
largest  companies  show  the  same  tendencies,  the  next 
two  largest  have  assets  composed  mostly  of  different 
assets  from  the  three  largest.  One  company  laid  great 
stress  on  having  mostly  all  its  assets  invested  in  mort- 
gage loans,  until  a  change  in  the  management  caused 
other  securities  to  be  preferred.  These  personal  ele- 
ments have  not  been  discussed.  The  object  of  the  chap- 
ter has  been  to  point  out  the  causes  of  the  general  move- 
ments. 

In  this  connection  it  is  interesting  to  see  what  are 

OF 


44 


THE  CHARACTER  OF  THE  INVESTMENTS. 


the  assets  of  companies  located  in  other  countries  under 
different  conditions  as  to  industrial  development  and 
laws.  The  following  table  shows  the  character  of 
Canadian  companies'   investments. 

TABLE  SHOWING  THE  ASSETS  OF  CANADIAN 
COMPANIES. 


Kind  of  Assets. 

1877 

1882 

1887 

1892 

1896 

1901 

Real  Estate 

4.6 
22.9 
51.1 

1.0 

9.5 

10.9 

4.9 
26.9 
44.1 

3.5 

8.5 
12.0 

3.8 

38.8 
29.6 

8.8 

8.0 
10.9 

7.9 
43.3 
24.1 

8.6 

8.7 
7.3 

37.3 

26.8 

7.2 

10.5 

Mortgage  Loans 

28.8 

Bonds  and  Stocks 

Collateral  Loans 

40.9 
5.9 

Policy    Loans   and    Pre- 
mium Notes 

9.7 

Uninvested  Assets 

At  the  present  time  the  table  shows  that  the  Cana- 
dian companies  have  practically  the  same  percentage 
of  their  assets  invested  in  loans  on  real  estate  as  have 
the  United  States  companies.  Bonds  and  stocks  form 
a  somewhat  larger  percentage,  having  increased  rapidly 
during  the  last  ten  years  as  an  opening  for  the  invest- 
ment of  insurance  funds.  This  sudden  increase  has  not 
been  due  alone  to  the  growing  popularity  of  corporation 
bonds  and  stocks  as  investments,  but  has  been  largely 
the  result  of  a  change  in  the  Canadian  law  regulating 
the  investments  of  insurance  companies  which  was 
passed  soon  after  1800.  The  Canadian  legislators  have 
not  selected  always  the  same  classes  of  investments  for 


THE  CHARACTER  OF  THE  INVESTMENTS. 


45 


the  companies  under  their  control  as  have  the  States, 
but  in  general  character,  insurance  legislation  in  Can- 
ada in  regard  to  limiting  the  investment  field  has  been 
modeled  more  or  less  after  the  legislation  in  this 
country. 

The  fact  that  Canada  is  so  near  to  the  United  States 
and  has  been  influenced  so  much  by  her  close  contact 
does  not  give  the  same  interest  to  her  companies'  ex- 
perience as  is  felt  in  the  experience  of  the  Australasian 
companies.  Australia,  far  away  from  other  influences, 
has  followed  English  custom  much  more  than  has 
Canada.  Especially  is  this  true  in  the  freedom  of 
investment  which  she  has  allowed  her  companies.  The 
following  table  shows  how  companies  in  that  country 
have  distributed  their  assets. 

TABLE    SHOWING    DISTRIBUTION   OF   THE  ASSETS   OF 
AUSTRALASIAN  COMPANIES.* 


Class. 

1885 

1890 

1895 

1900 

1902 

Real  Estate 

9.7 
56.0 
13.3 

1.1 

1.4 
11.6 

6.9 

10.5 

55.9 

7.9 

.7 

.7 

16.3 

7.0 

11.4 

48.5 

9.7 

.7 

.3 

20.2 

9.2 

10.6 

47.5 

15.9 

.3 

.2 

18.2 

7.3 

9.6 

Mortgages 

48.0 

Governm't  and  Municipal  Bonds 
Shares 

19.3 
.3 

Loans  on  Personal  Security 

Policy  Loans 

.1 
17.1 

Uninvested 

5.6 

1  Taken  from  the  Transactions  of  the  Faculty  of  Actuaries, 
Volume  11,  Part  IV,  page  120. 


46  THE  CHARACTER  OF  THE  INVESTMENTS. 

The  most  interesting  fact  about  the  investments  of 
the  Australasian  companies  is  the  extremely  small  pro- 
portion which  corporation  securities  form  of  the  total 
assets.  The  cause  lies  in  the  governmental  ownership 
of  railroads  and  of  other  undertakings  in  that  country 
which  in  the  United  States  are  left  to  private  enterprise. 
The  result  of  this  governmental  activity  is  of  interest 
to  company  managers  in  this  country  in  view  of  the  agi- 
tation at  present  for  municipal  ownership  of  public 
utilities  and  in  some  quarters  for  ownership  of  the  rail- 
roads. Officials  of  insurance  companies  have  at  times 
raised  a  note  of  alarm  against  such  a  procedure  in  the 
belief  that  it  would  lessen  too  much  their  field  of  profit- 
able investment.  There  is  very  little  cause  to  worry  on 
that  score.  If  the  cities  undertake  to  own  the  public 
utilities,  and  the  Federal  and  State  governments  the 
railroads,  the  investment  field  will  not  be  narrowed.  As 
in  Australia,  the  investment  securities  will  still  exist  as 
municipal,  state  and  government  bonds. 

In  other  respects,  the  distribution  of  assets  of  the 
Austraslian  companies  are  of  interest.  The  companies 
there  have  succeeded  in  keeping  practically  half  of  their 
assets  in  mortgage  loans,  the  proportion  of  these  of  the 
total  decreasing  but  little  in  twenty  years.  Policy  loans 
likewise  have  made  up  a  percentage  of  the  total  assets 
higher  than  in  any  other  country. 

Turning  now  to  the  countries  of  Europe,  it  is  found 


THE  CHARACTER  OF  THE  INVESTMENTS. 


47 


that  England,  the  first  country  in  which  systematic  life 
insurance  was  developed,  has  in  the  main  allowed  her 
companies  to  invest  their  assets  without  legal  restric- 
tion. This  gives  an  importance  to  the  statistics  of  Eng- 
lish companies  which  they  otherwise  would  not  possess. 
Since  1872,  the  assets  have  been  distributed  among  the 
various  classes  of  investments  as  follows : 


TABLE  SHOWING    DISTRIBUTION   OF -THE   ASSETS   OF 
ENGLISH  COMPANIES.1 


Kind  of  Assets. 


Mortgages 

Loans  on  Rates  and  Rent 
Charges 

Policy  Loans 

British  Government  Se- 
curities   

Colonial  Government 
Securities 

Foreign  Government 
Securities 

Railway  and  other  De- 
bentures  

Shares  and  Stocks 

Land  and  House  Prop- 
erty   

Life  Interests 

Loans  on  Personal  Se- 
curity  

Cash,  etc 


1872 

1880 

1885 

1890 

1895 

48.2 

46.2 

43.8 

40.4 

37.2 

10.5 
5.0 

4.6 
13.9 

4.7 
12.5 

4.6 
11.0 

4.7 
9.9 

7.7 

3.4 

2.8 

2.9 

2.2 

5.0 

4.0 

6.2 

6.6 

7.5 

1.2 

2.7 

2.3 

1.8 

2.0 

9.8 
2.6 

7.9 
4.2 

7.3 
6.1 

9.7 
6.7 

12.8 

7.2 

4.4 
1.6 

3.4 

1.8 

5.5 
1.9 

6.2 

1.8 

6.8 
2.1 

1.7 
2.9 

1.2 
6.7 

.8 
6.1 

.6 
7.6 

.7 
6.9 

1902 


28.4 

4.8 

8.7 

2.4 

6.5 

3.5 

17.6 
12.1 

8.0 

2.7 

.5 

4.8 


1  This  table  has  been  compiled  from  tables  given  by  Mr.  A.  G. 
McKenzie,  Journal  of  the  Institute  of  Actuaries,  Volume  29, 
page  193,  and  from  the  Transactions  of  the  Faculty  of  Actuaries, 
Volume  2,  Part  V,  page  110. 


48         THE  CHARACTER  OF  THE  INVESTMENTS. 

The  table  shows  that  the  English  companies  have 
since  1870  invested  approximately  the  same  percentage 
of  their  assets  in  mortgage  loans  as  have  the  companies 
in  this  country.  If  only  the  cash  assets  of  companies  in 
both  countries  were  considered,  it  would  be  seen  that 
the  falling  off  in  relative  amounts  of  mortgage  loans 
would  be  the  greatest  in  the  United  States.  That  this 
should  be  true  is  remarkable.  Since  1870,  England  has 
suffered  a  decline  in  agricultural  land  values  amount- 
ing to  millions  of  dollars,  thus  narrowing  the  field  for 
mortgage  loans.  In  the  United  States,  on  the  other 
hand,  land  values  of  all  kinds  have  risen  greatly,  giving 
a  field  for  mortgage  loans  much  broader  than  in  1870. 
That  our  companies  have  not  loaned  a  larger  proportion 
of  their  assets  on  real  estate  can  only  be  explained  by  a 
lack  of  desire  on  the  part  of  their  managers  for  such 
investments. 

The  experience  of  the  English  companies  with  policy 
loans  shows  that  such  assets  will  not  probably  increase 
much  more  in  the  United  States.  English  companies 
have  been  making  such  loans  since  1850,  and  though 
they  increased  rapidly,  both  relatively  and  absolutely, 
until  1880,  since  then  the  percentage  which  such  loans 
form  of  the  total  assets  has  declined. 

The  relatively  large  amount  of  cash  held  by  English 
companies  is  due  to  no  small  extent  to  the  fact  that  the 
companies  have  been  able  to  secure  a  higher  rate  of  in- 


THE  CHARACTER  OF  THE  INVESTMENTS. 


49 


terest  by  placing  deposits  in  colonial  or  foreign  banks 
than  they  could  by  investing  it  in  the  securities  on  the 
market  at  home. 

In  general,  English  companies  have  had  their  assets 
more  scattered  than  have  companies  of  the  United 
States.  A  low  rate  of  interest  at  home  has  induced  for- 
eign and  colonial  investments  until  now  nearly  one- 
fifth  of  the  assets  are  invested  outside  of  the  United 
Kingdom. 

On  the  continent  of  Europe,  life  insurance  has  only 
developed  in  two  countries  to  any  considerable  extent. 
These  are  Germany  and  France.  The  appended  table 
shows  the  distribution  of  the  assets  of  German  com- 
panies. 

TABLE   SHOWING   DISTRIBUTION    OF  THE   ASSETS   OF 
GERMAN  COMPANIES.1 


Kind  of  Assets. 


Mortgages 

Real  Estate 

Bonds  and  Stocks 
Collateral  Loans. . 

Policy  Loans 

Cash 

Other  Credits 


1876 

1889 

60.4 

71.3 

2.1 

•  2.8 

5.0 

4.8 

3.2 

.3 

3.3 

5.1 

.9 

.8 

25.1 

14.9 

1903 


79.5 
2.0 
2.7 
.0 
6.1 
1.9 
7.8 


1  The  statistics  for  1876  are  taken  from  the  Spectator,  1879, 
Volume  22,  page  164.  Those  for  1889  from  the  Spectator,  1890, 
Volume  45,  page  4.  For  1903  from  the  Jahrbuch  fur  das  Ver- 
sicherungsvvesen  in  Deutsches  Reiche,  1905,  pages  7  and  8. 

4 


50         THE  CHARACTER  OF  THE  INVESTMENTS. 

The  proportion  which  mortgages  form  of  the  total 
assets  of  the  German  companies  shows  what  can  be 
done  in  that  investment  field.  With  sixty  per  cent,  of 
their  accumulations  invested  in  loans  on  real  estate  as 
security  in  1876,  in  1903  they  had  increased  the  per- 
centage to  nearly  four-fifths  of  the  total  assets.  There 
is  one  large  company  in  the  United  States  which  is 
popularly  spoken  of  in  insurance  circles  as  having  all 
its  funds  invested  in  mortgage  loans,  yet  this  individual 
company  does  not  have  as  large  a  proportion  of  its  assets 
so  invested  as  do  all  the  German  companies  averaged 
together.  In  other  respects,  the  German  statistics  are 
worthy  of  careful  consideration.  Of  objectionable  as- 
sets, such  as  real  estate  absolutely  owned,  collateral 
loans  and  cash,  the  German  companies  possess  mini- 
mum amounts. 

The  other  continental  country  in  which  there  has 
been  some  considerable  development  of  life  insurance  is 
France.  If  England  is  known  as  the  country  where 
the  state  has  adopted  a  laissez  faire  policy  towards 
the  insurance  companies,  France  should  be  known  as 
the  country  in  which  the  opposite  policy  has  predomi- 
nated. In  no  other  country  have  the  life  insurance 
companies  been  so  restricted  in  the  matter  of  their  in- 
vestments as  in  France.  This  gives  to  the  following 
table  an  unusual  interest. 


THE  CHARACTER  OF  THE  INVESTMENTS. 


51 


TABLE  SHOWING  DISTRIBUTION  OF  ASSETS  OF  FRENCH 
COMPANIES.1 


Kind  of  Assets. 


Heritable  Property 

French  Government  Securities 
French  Securities  Guaranteed. 

Foreign  Stocks  and  Bonds 

Policy  Loans 

Mortgage  Loans 

Cash 

Other  Assets 


1878 

1884 

17.2 

26  o 

31.3 

18.0 

22.2 

39.4 

.0 

1.6 

1.5 

2.5 

.1 

2.8 

.1 

.9 

27.5. 

8.8 

25.3 

13.4 

29.8 

10.8 

3.3 

6.4 

.3 

10.6 


French  companies  have  a  large  proportion  of  their 
assets  in  real  estate  and  small  amounts  in  real  estate 
loans.  For  a  number  of  years  the  French  laws  pro- 
hibited the  life  insurance  companies  from  loaning  on 
real  estate.  Likewise,  the  government  narrowly  limited 
the  investment  field  in  other  directions.  Kestricted  in 
the  investment  field  to  low-earning  securities,  the 
French  companies  found  it  necessary  to  turn  their  at- 
tention to  an  asset  which  has  been  a  drug  for  the  life 
insurance  companies  in  nearly  all  parts  of  the  world, 
and  especially  in  the  United  States,  namely,  real  estate 
absolutely  owned  by  them.  The  results  in  earning 
power  show  the  difference  between  an  investment  in  real 
estate  for  the  sake  of  the  earnings  and  an  investment 
made  for  advertising  purposes.     American  and  French 

1  The  statistics  for  1878  are  from  the  Insurance  Spectator,  1879, 
Volume  22,  page  565.  For  1884  and  1898  from  the  Transactions 
of  the  Actuarial  Society  of  Edinburgh,  Volume  4,  page  508. 


52         THE  CHARACTER  OF  THE  INVESTMENTS. 

companies  have  both  invested  in  Paris  real  estate,  the 
American  investment  has  shown  little  or  no  net  return, 
but  the  Trench  companies  have  had  a  favorable  ex- 
perience with  their  real  estate  possessions.  The  re- 
strictions against  mortgage  loans  have  now  been  re- 
moved, and  mortgage  loans  are  beginning  to  form  a  con- 
siderable proportion  of  the  assets  of  the  French  com- 
panies. The  other  regulations  concerning  the  invest- 
ments have  also  been  broadened,  allowing  freer 
scope  to  the  company  managers,  so  that  the  character  of 
the  French  assets  is  changing  rapidly. 

Having  completed  our  study  of  the  character  of  the 
assets  what  conclusions  are  to  be  drawn  ?  Very  few  so 
far  as  the  results  of  this  chapter  indicate,  for  the  value 
of  an  asset  depends  not  only  upon  the  safety  of  the 
principal,  but  also  upon  the  rate  of  interest,  and  this 
latter  we  have  not  yet  determined. 

Anticipating  somewhat,  we  can  conclude  with  much 
certainty  that  some  companies  do  not  have  as  large  a 
proportion  of  their  assets  invested  in  mortgage  loans 
as  they  should.  These  loans  do  not  possess  all  the 
merits  sometimes  ascribed  to  them,  but  they  do  possess 
certain  characteristics  which  make  them  a  good  in- 
vestment for  a  considerable  portion  of  the  funds.  Of 
all  the  assets  having  a  value  little  subject  to  fluctuations, 
mortgage  loans  are  unexcelled.  The  net  rate  of  interest 
will  be  found  to  be  equal  to  that  of  other  securities,  in 


THE  CHARACTER  OF  THE  INVESTMENTS.         53 

most  instances  greater.  However,  it  is  not  urged  that 
even  for  the  sake  of  the  higher  return  which  can  be 
secured  from  such  loans  that  mortgages  should  form 
anything  like  nearly  all  the  invested  assets.  We  have 
seen  that  companies  with  too  much  of  their  assets  in 
mortgages  suffered  severely  during  periods  of  extreme 
depression.  With  large  assets,  it  would  be  a  heavy 
burden  upon  an  investment  department  to  loan  and 
supervise  so  large  a  proportion  as  was  once  loaned  on 
real  estate,  and  mortgages  not  carefully  supervised  are 
risky  investments,  but  the  investment  department 
should  not  be  relieved  too  much.  As  yet,  the  labor  ex- 
pended in  pursuing  a  policy  of  real  estate  loaning  has 
been  well  repaid. 

That  it  is  possible  to  invest  large  assets  in  mort- 
gages is  shown  by  the  experiences  of  the  German  com- 
panies. Even  English  companies  with  rural  land 
values  gone  to  pieces  have  a  larger  proportion  of  their 
assets  invested  in  mortgages  than  do  the  companies  in 
the  United  States.1 

Under  present  conditions,  the  amount  which  securi- 
ties dealt  in  on  the  exchanges  form  of  the  total  assets 
must  at  least  be  regulated  by  the  surplus  of  the  com- 
panies.   The  depression  in  values  in  1891  and  1892  and 


1  For  a  discussion  of  the  possibilities  of  mortgage  loans  see 
Dawson's  "  The  Business  of  Life  Insurance,"  Chapters  XXVII 
and  XXVIII. 


54         THE  CHARACTER  OF  THE  INVESTMENTS. 

again  in  1903  is  sufficient  to  show  that  with  the  methods 
now  in  vogue  of  valuing  such  securities,  they  must  not 
form  a  large  proportion  of  the  assets  unless  the  com- 
panies possess  a  considerable  surplus.  The  limitations 
on  other  assets,  such  as  cash,  real  estate,  collateral  loans, 
have  been  already  discussed. 

Having  seen  of  what  the  assets  of  life  insurance  com- 
panies consist  and  how  these  assets  have  changed  in 
character  from  decade  to  decade,  our  next  step  will  be 
to  find  out  what  has  been  the  earning  power  of  these 
various  investments.  A  study  of  this  will  be  made  in 
the  following  chapter. 


CHAPTER  III. 


INVESTMENT    EARNINGS. 


The  rate  of  interest  is  one  of  the  most  vital  problems 
in  the  insurance  world.  When  life  insurance  was  first 
introduced  in  the  United  States  term  policies  were  the 
kind  mostly  written.  With  these  the  rate  of  interest 
is  not  an  important  factor.  Then  came  life  payment 
policies,  and  the  cost  of  such  policies  is  affected  ma- 
terially by  the  rate  of  interest.  Finally  with  the  advent 
of  endowment  policies,  and  with  the  development  of 
modified  forms  of  endowments,  such  as  bond  policies, 
and  others  involving  a  large  element  of  investment,  the 
rate  of  interest  is  one  of  the  most  important  factors  de- 
termining the  cost  of  such  policies.  Because  of  the 
popularity  of  such  policies  and  because  of  the  great 
growth  of  the  assets  to  be  invested  at  some  rate  of  in- 
terest, what  that  rate  is,  is  of  much  significance  to  the 
insurance  world. 

Before  level  premium  policies  can  be  written  some 
rate  of  interest  must  be  assumed  at  which  that  portion 
of  the  premium  which  is  reserved  will  accumulate.  Be- 
fore the  establishment  of  state  insurance  departments, 

55 


56  INVESTMENT  EARNINGS. 

and  even  after,  the  companies  were  allowed  to  assume 
any  rate  of  interest  in  computing  their  premiums. 
When  the  state  departments  were  organized  for  the 
purpose  of  supervising  the  companies,  some  test  of  solv- 
ency had  to  be  decided  upon.  To  know  the  assets  meant 
nothing  unless  the  liabilities  were  also  determined.  To 
determine  the  liabilities,  a  rate  of  interest  must  be  as- 
sumed, and  of  the  New  York  companies  incorporated 
under  the  general  law  of  1849  none,  except  the  Globe, 
had  restricted  itself  in  any  way  as  to  a  standard  of 
interest.  Most  of  the  companies  had  themselves  as- 
sumed a  conservative  rate,  but  certain  managers,  san- 
guine of  the  future,  had  based  their  premiums  on  the 
assumption  that  the  assets  would  earn  six  per  cent. 

Massachusetts  under  the  leadership  of  her  brilliant 
commissioner,  Elizur  Wright,  in  1857,  enacted  that 
four  per  cent,  should  be  used  as  a  basis  for  computing 
the  liabilities  of  a  company.  Georgia  two  years  later 
made  the  same  rate  the  legal  standard  for  companies 
doing  business  in  that  State.1  Until  after  the  Civil 
War  these  were  the  only  States  which  had  adopted  a 
legal  basis  for  finding  the  liabilities  of  the  life  com- 
panies. 

However,  the  rate  specified  by  the  Massachusetts  law 
was  becoming  the  one  generally  adopted  by  the  com- 
panies of  other  states,  otherwise  they  could  not  trans- 
1  Act  of  December  12,  1859,  Section  4. 


INVESTMENT  EARNINGS,  57 

act  business  in  Massachusetts.  In  1862  there  were 
seventeen  American  companies  writing  insurance  in 
New  York.  Of  these,  eleven  assumed  that  their  assets 
would  earn  four  per  cent.,  three  a  rate  of  five  per  cent., 
and  one  six  per  cent.,  and  one  did  not  state  in  its  an- 
nual report  what  rate  it  did  assume.1  The  Civil  War 
brought  a  higher  rate  of  interest,  and  new  companies 
were  formed  whose  managements  chose  the  higher  rates. 
The  confusion  in  standards  adopted  by  the  various  com- 
panies led  New  York  to  enact  a  law  providing  for  a 
legal  rate.  A  five  per  cent,  standard  was  adopted  in 
18  6  6.2  Two  years  later,  in  the  hope  of  securing  uni- 
formity of  standards,  New  York  lowered  the  legal  rate 
to  four  and  one-half  per  cent,  with  the  expectation  that 
Massachusetts  would  raise  her  standard  rate  to  that  per 
cent.,3  but  Massachusetts  maintained  the  four  per  cent, 
basis. 

The  troubles  which  began  to  disturb  the  insurance 
world  during  the  late  sixties  brought  a  number  of  laws 
providing  for  legal  standard  rates  of  interest.  Wis- 
consin in  1870  established  a  four  and  one-half  per  cent. 
basis.4  Other  states  enacted  similar  laws.  Thus  in 
1873,  Massachusetts,  Maine,  Connecticut,  New  Hamp- 
shire, and  Illinois  had  the  four  per  cent,  standard  rate, 

1  New  York  Insurance  Report,  1863,  Page  643. 

9Act  of  April  24,  1866. 

8  Insurance  Times,  August  1869. 

*  Act  of  March  14.  1870,  Section  10. 


58  INVESTMENT  EARNINGS. 

while  fifteen  others  had  a  four  and  one-half  per  cent. 
basis,1  and  Texas  and  Pennsylvania  allowed  stock  life 
insurance  companies  the  liberal  rate  of  six  per  cent,  in 
calculating  their  liabilities. 

These  legal  standard  rates  of  interest  are  important, 
because  they  show  what  was  then  thought  to  be  the  rate 
of  interest  which  could  be  expected  for  half  a  century 
in  advance.  As  is  evident,  the  discussion  at  that  time 
was  entirely  as  to  whether  a  four  and  one-half  per  cent, 
standard  should  be  adopted  or  a  four  per  cent,  standard. 
There  was  a  movement  during  the  hard  times  of  the 
seventies  on  the  part  of  a  number  of  states  to  a  four 
per  cent,  basis,  but  there  were  few  who  believed  that 
any  lower  standard  rate  than  four  would  be  needed  for 
years  to  come.  The  insurance  world  was  not  a  little 
startled  when,  in  1882,  the  Connecticut  Mutual  an- 
nounced that  its  new  business  would  be  done  on  a  three 
per  cent,  basis.  In  the  same  year,  the  Massachusetts 
Commissioner  of  Insurance  likewise  raised  the  question 
of  a  lower  interest  basis.  New  York  still  had  the  four 
and  one-half  per  cent,  standard,  but  the  lower  actual 
earnings  led  to  the  adoption  of  a  four  per  cent,  standard 
in  1884. 

There  was  not  a  great  deal  more  heard  of  a  lower  in- 
terest basis  until  after  1830.  The  companies  with  the 
exception  of  the  Connecticut  Mutual  were  on  a  four 
1  Connecticut  Insurance  Report,  1874,  Page  XLII. 


INVESTMENT  EARNINGS.  59 

per  cent,  basis,  and  a  number  of  states  still  allowed  the 
five  per  cent,  standard.  In  1892,  the  United  States 
Life  voluntarily  went  on  a  three  per  cent,  basis  for  new 
business.  Soon  after  the  feeling  that  some  reduction 
in  the  assumed  rate  was  necessary  became  widespread.1 
The  insurance  commissioners  in  their  annual  convention 
of  1893  urged  the  general  adoption  of  a  three  per  cent, 
standard,  and  in  1894,  the  legislatures  of  two  states 
considered  the  advisability  of  such  a  rate.  In  IS 9 6, 
three  companies  adopted  three  per  cent,  for  new  busi- 
ness, and  the  discussion  was  no  longer  whether  the  four 
per  cent,  rate  should  be  lowered,  but  whether  it  should 
be  lowered  to  three  and  one-half,  or  to  three  per  cent. 

The  companies  began  changing  the  rate  rapidly. 
With  the  larger  and  older  companies  the  three  per  cent, 
standard  was  usually  adopted.  Massachusetts  was  the 
first  state  to  go  below  four  per  cent.,  adopting  a  three 
and  one-half  per  cent,  basis  in  1899. 

Connecticut  and  E"ew  York  have  since  enacted  simi- 
lar laws.  In  general  the  other  states  are  on  a  four  per 
cent,  basis.  In  1903,  eight  states  still  retained  the  four 
and  one-half  per  cent,  standard,  but  changes  are  being 
made  to  lower  rates. 

The  legal  basis  was  fixed  at  a  conservative  rate  forty 
years  ago  when  the  states  first  began  establishing  a  test 
for  solvency.  The  rate  selected  was  far  under  the 
1  Laws  of  1884,  Chapter  341. 


60  INVESTMENT  EARNINGS. 

actual  rate  earned  by  the  assets.  Yet,  despite  the  con- 
servative rate  adopted,  the  states  have  had  to  twice 
change  the  rate  to  a  lower  one,  and  the  companies  like- 
wise are  assuming  a  rate  averaging  fully  one  and  one- 
half  per  cent,  lower  than  in  the  sixties.  It  is  unneces- 
sary to  state  that  these  changes  in  the  assumed  rate 
have  been  due  to  a  serious  decline  in  the  rate  of  interest 
actually  earned  by  the  companies. 

If  we  study  the  rate  of  interest  in  the  United  States 
from  the  period  of  the  Civil  War,  we  shall  find  that 
there  has  been  one  tendency  through  the  whole  period, 
the  movement  toward  lower  rates.  Much  discussion  in 
insurance  circles  has  been  based  on  the  showing  of  this 
period.  The  conclusion  has  been  that  the  tendency  of 
interest  is  to  decline,  and  investments,  especially  dur- 
ing the  past  fifteen  years,  have  been  made  on  the  as- 
sumption that  the  rate  of  interest  for  a  long  time  was  to 
continue  to  decline.  It  is  a  mistake  to  base  conclusions 
on  a  study  of  the  period  since  the  Civil  War  and  of 
this  period  alone.  Valid  conclusions  must  be  based  on 
a  wider  study. 

There  is  a  belief  widely  prevalent  that  the  rate  of 
interest  has  been  high  throughout  the  history  of  the 
United  States  until  recent  years,  and  that  there  has 
been  a  gradual  decline  to  what  is  known  as  the  present 
low  rate.  This  is  not  exactly  true.  It  is  a  fact  that  in 
general  the  rate  of  interest  in  the  United  States  has 


INVESTMENT  EARNINGS.  61 

been  higher  than  in  Europe,  especially  in  England,  but, 
relatively  speaking,  the  rate  was  not  steadily  high  dur- 
ing the  early  history  of  the  country,  nor  has  there  been 
a  gradual  decline.  The  real  situation  is  that  the  rate 
has  been  a  fluctuating  one.  During  colonial  times  six 
per  cent  was  altogether  a  common  rate  of  interest.  Be- 
fore the  Revolutionary  War  loans  could  be  secured  on 
desirable  mortgages  in  JSTew  York,  State  at  five  per 
cent.,  which  cannot  be  considered  as  a  high  rate  on 
mortgage  loans,  for  many  borrowers  are  paying  more 
even  now. 

Passing  over  several  decades  after  the  Revolutionary 
War,  because  statistics  of  the  rate  of  interesx  are  not 
available,  we  find  that  during  the  thirties  the  rate  of 
interest  fluctuated  rapidly.  In  1836  an  extremely  high 
point  was  touched.  During  the  severe  depression  fol- 
lowing the  crisis  of  1837-9  the  rate  went  as  low  as 
four  per  cent,  on  many  loans,  the  ordinary  rate  fluctuat- 
ing around  six  per  cent.  From  1840  to  1860  the  best 
state  and  government  bonds  sold  on  a  five  per  cent, 
basis.  It  was  a  period  during  which  the  country  was 
expanding  rapidly,  much  new  land  was  being  settled, 
and  the  rate  of  interest  on  mortgage  loans  was  higher 
than  on  the  best  state  bonds,  and  there  were  great  di- 
vergencies in  various  portions  of  the  country.  How- 
ever, enough  has  been  given  to  show  that  before  1860 
the  rate  was  not  steadily  high,  that  a  rate  of  five  per 


62  INVESTMENT  EARNINGS. 

cent,  was  not  uncommon  and  even  four  per  cent,  inter- 
est was  known. 

Unfortunately  we  do  not  possess  the  statistics  of  a 
mass  of  assets  such  as  are  represented  by  the  life  com- 
panies' investments  before  1850.  There  are  savings 
banks  statistics,  and  these  are  valuable,  though  repre- 
senting a  more  restricted  character  of  securities  than 
the  insurance  companies  have  purchased.  A  deposit 
made  with  the  Salem  Savings  Bank  in  1823  accumu- 
lated until  1871  at  the  rate  of  five  and  nine-tenths  per 
cent,  above  all  cost.1  The  Society  of  Savings  of  Hart- 
ford accumulated  a  deposit  from  1825  to  1871  at  the 
rate  of  five  and  six-tenths  per  cent.  The  Savings  Bank 
of  Newport  received  a  deposit  of  thirty  dollars  in 
1827,  and  accumulated  it  at  the  rate  of  five  and  three- 
tenths  per  cent,  above  all  charges.  These  statistics  show 
that  for  such  investments  as  the  savings  banks  were  al- 
lowed to  make,  the  rate  of  interest  for  fifty  years  was 
probably  under  six  per  cent. 

From  1850  to  1860,  the  statistics  of  the  income  and 
assets  of  a  number  of  life  insurance  companies  are 
available.  In  the  following  table,  the  companies  and 
the  rates  realized  by  them  during  certain  years  are 
given.2 

1  The  Insurance  Monitor,  1882,  Page  239. 

2  This  table  is  compiled  from  statistics  given  in  William 
Barnes' condensed  edition  of  the  New  York  Insurnnce  Reports 
for  the  yeais  after  the  general  incorporation  act  was  passed  iu 


INVESTMENT  EARNINGS. 


63 


1850 

1851 

1852 

1853 

18541855 

1856 

1857 

5.3 
6.6 
5.8 
6.9 
5.7 
7.2 
5.8 

1858 

6.5 
6.3 
5.9 
6.4 
5.5 
3.6 
3\6 

1859 

6.5 
6.6 
5.7 

4.8 
5.5 
3.8 
6.0 

6.6 

6.8 
5.8 
6.6 
5.4 
5.4 
5.8 

6  4 

Manhattan 

Mutual  Benefit 

Mutual  Life 

5.1 

5.6 
5.3 

3.2 
5.5 

2.4 
5.6 

5.7 
5.7 
5.0 
6.0 
7.1 
5.8 

6.0 
6.0 
6.2 

New  England 

New  York  Life 

United  States 

6.0 

5.3 
i'.i 

6.3 
'9.3 

5.9 

7.2 
4.5 

5.8 
5.4 
5.9 

For  these  seven  companies,  the  table  gives  fifty-six 
annual  rates  of  interest.  Of  these  fifty-six  annual  rates, 
thirty-four  are  below  six  per  cent.,  five  rates  are  exactly 
six  per  cent,  and  only  seventeen  are  above  six  per  cent. 
Nine  rates  are  as  low  as  five  per  cent,  or  lower,  and  only 
four  are  above  seven  per  cent.  These  statistics  are  of 
a  period  when  the  companies  were  small,  but  they  show 
in  a  general  way  that  the  rate  of  interest  for  the  decade 
1850-60  was  below  six  per  cent. 

Since  1860  the  data  for  finding  the  rate  of  earnings 
secured  by  the  life  companies  on  their  investments  is 
more  abundant.  We  have  already  noticed  that  the 
New  York  Department  of  Insurance  began  to  issue  re- 
ports in  1860.  As  well  as  giving  the  assets,  these  re- 
ports have  given  in  some  detail  the  income  produced  by 
certain  large  classes  of  the  assets.  From  these  reports, 
and  from  those  of  other  states  when  the  New  York 
reports  did  not  contain  the  information,  a  number  of 

1849  till  1859  when  the  insurance  department  was  established  and 
began  issuing  annual  reports. 


64  INVESTMENT  EARNINGS. 

tables  have  been  compiled  to  show  the  investment  earn- 
ings of  twenty-nine  companies.  These  twenty-nine  were 
chosen  because  they  were  the  ones  which  had  over  five 
million  dollars  of  assets  on  December  31,  1903. 1  In 
these  tables  the  asset  history  has  been  given  from  1860 
whenever  possible.  In  the  case  of  some  companies  they 
did  not  exist  at  that  time,  others  were  not  doing  busi- 
ness in  a  state  which  published  annual  reports.  In  all 
cases,  the  tables  go  back  as  far  as  possible. 

As  the  method  adopted  in  finding  the  rate  of  invest- 
ment earnings  in  these  tables  has  never  been  used  in 
the  numerous  tables  of  the  rate  of  interest  earned  by 
life  insurance  companies  which  have  been  published, 
an  extended  explanation  will  be  given  of  it.  In  taking 
the  amount  of  assets  to  use  as  a  basis  for  computing  the 
annual  rate  of  earnings,  mean  market  value  has  been 
chosen.  The  mean  for  the  year  is  taken  because  the 
companies  report  the  amount  of  assets  on  hand  at  the 
end  of  the  year.  This  is  not  the  same  amount  which 
they  had  twelve  months  earlier.  In  almost  all  cases 
there  has  been  a  considerable  increase,  and  this  in- 
crease has  been  bearing  interest  only  a  part  of  the  year. 
Hence  to  be  right  the  mean  amount  must  be  used  as  a 
basis. 

1  The  Mutual  Reserve  had  five  million  dollars  of  assets  at  this 
time,  but  as  it  had  been  recently  changed  from  an  assessment 
to  a  level  premium  company,  it  is  not  included.  Since  1903,  one 
other  company  has  passed  the  live  million  mark  in  assets. 


INVESTMENT  EARNINGS.  65 

But  taking  a  mean  involves  some  choice  of  several 
values  of  the  assets.  There  is  no  general  agreement 
as  to  the  value  of  assets.  There  is  cost  value,  book 
value,  and  market  value.  Which  one  should  be  used  ? 
Cost  value  may  be  immediately  rejected,  for  with  it 
no  rate  of  any  real  significance  can  be  secured.  Sup- 
pose that  a  hundred  dollar  bond  payable  in  twenty 
years  and  bearing  interest  at  five  per  cent,  is  purchased 
at  a  cost  of  one  hundred  and  twenty-five  dollars.  Now 
by  taking  cost  value  of  this  bond,  the  rate  of  earning 
power  for  nineteen  years  would  be  four  per  cent.,  and 
for  the  twentieth  year  there  would  be  an  outgo  of 
twenty-one  dollars  due  to  the  paying  off  of  the  bond  at 
face  value,  while  the  cost  was  twenty-five  dollars  more. 
The  real  annual  earning  power  then  of  the  bond  was 
not  four  but  three  and  twenty-nine  hundredths  per  cent. 
Now  as  few  bonds  are  actually  purchased  at  face  value, 
and  since  taking  cost  value  as  a  basis  does  not  take  into 
consideration  the  loss  or  gain  due  to  the  difference  be- 
tween the  face  value  and  the  actual  cost  of  the  bond 
it  can  be  immediately  rejected. 

Neither  can  book  value  be  used.  Book  value  is  the 
result  of  an  actuarial  computation  showing  the  value  a 
bond  possesses  each  year  if  a  steady  income  is  to  be  re- 
ceived from  it  from  the  time  of  purchase  till  maturity. 
The  rate  of  income  found  on  such  a  basis  simply  shows 
what  the  company  expected  to  receive  when  it  purchased 
5 


66  INVESTMENT  EARNINGS. 

the  bond,  and  book  values  of  the  assets  would  give  us  a 
rate  which  would  be  a  rate  compounded  of  the  rates 
which  were  expected  forty  years  ago,  thirty-nine  years 
ago,  thirty-eight  years  ago,  etc.,  until  the  present.  It 
can  be  readily  seen  that  such  a  rate  would  not  mean  any- 
thing. Besides  there  are  two  large  classes  of  assets 
which  have  no  book  value  in  the  same  sense  as  book 
value  is  used  of  bonds.  These  classes  are  stocks  and 
real  estate.  Thus  book  value  is  unavailable  in  finding 
what  has  been  the  actual  rate  of  investment  earnings 
from  year  to  year. 

Market  value  of  the  assets  remains,  and  it  is  this 
value  which  has  been  used  as  the  basis  for  computing 
the  rate  of  investment  earnings.  By  using  it  as  a  basis, 
the  actual  rate  of  each  year  can  be  obtained.  This  is 
true,  however,  only  as  we  include  other  items  in  our 
income  account  than  mere  interest  receipts.  These 
items  are  items  of  investment  fluctuation.  To  show 
this,  let  us  take  a  concrete  example.  Suppose  a  com- 
pany this  year  buys  a  Hve  per  cent,  bond  at  par.  The 
cost  and  book  value  of  that  bond  would  remain  at 
100.  Suppose  a  year  hence  the  market  value  of  that 
bond  is  125,  what  is  the  rate  of  earning  power  of  that 
bond  ?  The  company  could  sell  that  bond  for  twenty- 
five  plus  ^.ve  dollars  accrued  interest  more  than  it  gave. 
Thus  the  earning  power  of  that  bond  during  the  year 
would  have  actually  been  thirty  per  cent. 


INVESTMENT  EARNINGS.  67 

If  it  be  objected  to  this  plan  that  companies  do  not 
sell  their  assets,  but  keep  them  to  maturity,  it  may  be 
replied  that  stocks  and  real  estate  do  not  have  any  per- 
iod of  maturity.  Furthermore,  companies  do  sell  their 
securities  and  reap  the  benefits  from  an  increase  in 
market  value  over  book  or  cost  value.  But  if  they  did 
not,  and  if  they  did  not  own  any  stocks  or  real  estate, 
the  validity  of  the  method  used  would  not  be  touched. 
The  purpose  of  the  method  is  to  discover  what  the 
actual  earning  rate  of  the  assets  has  been  for  each  year. 
If  a  company  has  bought  poor  bonds  and  these  bonds 
have  depreciated  in  value,  it  is  universally  recognized 
that  this  depreciation  should  be  taken  account  of  in  the 
earning  rate.  Vice  versa,  if  the  management  has  been 
far-sighted,  or  fortunate  enough  to  secure  appreciating 
securities,  the  appreciation  should  be  considered  as  an 
earning  and  ascribed  to  the  year  in  which  it  occurred. 

In  the  following  tables  the  investment  fluctuation  has 
been  found  through  a  set  of  separate  tables.  One  side 
of  these  tables  contained  the  positive  items  of  fluctua- 
tion, namely,  gain  in  market  value,  gain  from  sale  or 
maturity  of  the  assets,  and  gain  from  profit  and  loss. 
The  negative  elements  are  composed  of  loss  in  market 
value,  loss  from  sale  or  maturity,  loss  from  adjustment 
of  book  value,  and  loss  from  profit  and  loss.  The  posi- 
tive items  have  been  added  together  and  the  negative 
items  added.    If  the  positive  items  or  the  gain  exceeded 


68  INVESTMENT  EARNINGS. 

the  negative  items  or  the  losses,  the  difference  has  been 
added  to  the  interest  receipts  for  the  year.  If  the  nega- 
tive items  were  in  excess,  the  difference  has  been  sub- 
tracted from  the  interest  receipts  to  get  the  total  earn- 
ing power.  These  items  of  investment  fluctuation  have 
been  found  in  the  following  manner.  Market  value  over 
book  value  of  the  assets  is  reported  each  year.  By  tak- 
ing the  market  value  over  book  value  at  the  beginning 
of  the  year,  and  at  the  end  of  the  year,  the  gain  or  de- 
crease can  be  found  for  each  year. 

Likewise  a  company  which  has  bonds  with  a  market 
value  above  book  value  may  sell  the  bonds  and  realize 
a  gain  from  the  sale,  or  it  may  sell  the  bonds  at  a  value 
less  than  book  value,  in  which  case  it  would  realize 
a  loss.  Few  dispute  the  correctness  of  the  plan  of 
counting  in  such  gains  or  losses  as  these  in  finding  the 
earning  rate  of  the  assets.  In  the  same  manner  the 
company  may  realize  a  gain  or  a  loss  from  the  maturity 
of  the  assets.  If  a  bond  is  carried  at  a  book  value  below 
par,  and,  maturing,  is  paid  at  par,  the  company  realizes 
a  gain.  If  carried  above  par,  the  maturing  of  the  loan 
causes  a  loss.  In  this  way  is  explained  the  gain  and 
loss  from  the  sale  or  maturity  of  the  assets. 

A  gain  or  a  loss  from  adjustment  of  book  value  must 
be  considered.  We  have  said  that  market  value  above 
book  value  was  included  in  the  earnings.  ISTow  if  the 
change  in  the  book  value  were  not  considered,  a  com- 


INVESTMENT  EARNINGS.  69 

pany  could  by  changing  their  book  values  make  market 
values  anything  they  might  choose.  By  decreasing  the 
book  value  the  excess  of  market  value  is  increased. 
Therefore  in  finding  the  real  investment  earnings  this 
change  in  book  value  is  taken  into  the  account.  It  is 
possible  to  have  a  gain  from  the  adjustment  of  book 
value,  but  this  has  happened  so  infrequently  that  it  has 
been  included  under  gain  from  increase  in  market  val- 
ues. 

The  profit  and  loss  amounts  have  been  the  hardest 
to  handle.  It  is  perfectly  evident  that  such  amounts 
could  arise  from  the  insurance  side  of  the  business,  and 
in  many  cases  it  is  impossible  from  the  report  to  dis- 
cover whether  they  should  be  considered  in  the  in- 
vestment account  or  not.  When  discovered  as  arising 
from  the  insurance  side  they  have  not  been  included 
in  the  investment  fluctuations.  Much  care  has  been 
exercised  in  regard  to  this  item,  but  doubtless  mistakes 
have  been  made,  for  often  profit  and  loss  has  been  re- 
ported without  any  indication  as  to  where  it  arose. 

This  brings  us  to  consideration  of  the  amount  entitled 
"  interest  earned  but  not  received."  Interest  earned 
but  not  received  for  any  year  is  the  difference  between 
the  accrued  interest  at  the  beginning  of  the  year,  and  the 
amount  accrued  at  the  end  of  the  year.  The  difference 
may  be  positive  or  negative.  This  item  must  be  con- 
sidered if  the  real  earning  rate  is  to  be  found,  as  a 


70  INVESTMENT  EARNINGS. 

glance  at  the  amounts  of  such  accrued  interest  will  show. 
Interest  receipts  need  no  explanation.  The  amounts 
under  this  heading  are  the  actual  amounts  received  as 
interest  and  rents  during  the  year,  no  matter  where  it 
was  earned.  The  total  earning  power  is  simply  the 
algebraic  sum  of  the  amounts  in  the  three  preceding 
columns. 

The  tables  simply  give  the  rate  of  earning  power. 
The  term,  "  rate  of  earning  power,"  has  been  used  to 
distinguish  the  rate  here  found  from  those  which  are 
commonly  called  rates  of  interest.  In  getting  this  Tate 
the  formula 

a  +  a      e 


2         .2 

has  been  used  when  X  is  the  rate  sought,  e  is  the  in- 
vestment earnings,  a  is  the  assets  at  the  beginning  of  the 

,  a+a' 

year,  and  a   is  the  assets  at  the  end  of  the  year.  — g — 

corresponds  to  the  amount  entitled  mean  market  value. 
The  reason  for  subtracting  half  of  the  interest  earn- 
ings from  the  mean  assets  is  as  follows.  Let  us  assume 
that  the  interest  is  paid  annually,  and  that  the  interest 
payments  are  evenly  distributed  throughout  the  year. 
It  is  evident  that  under  these  assumptions  the  value  of 
the  assets,  which  value  includes  accrued  interest,  is 
greater  than  the  value  of  the  assets  bearing  interest. 


INVESTMENT  EARNINGS.  71 

Take  any  point  of  time  during  the  year.  Some  of  the 
securities  have  just  received  their  interest  payments, 
others  are  about  to  receive  theirs,  while  others  are  mid- 
way between  the  two  periods.  Take  a  bond  for  instance 
bearing  four  per  cent,  interest,  payable  July  1.  On 
July  2  the  value  of  the  bond  is  100.  During  the  year 
its  value  slowly  rises  until  by  the  end  of  next  June  its 
value  is  104.  The  mean  value  during  the  year  is  102. 
This  value  could  be  taken  as  the  basis  of  computing  the 
interest  rate  and  a  rate  found.  By  general  agreement, 
however,  the  principal  at  the  beginning  of  the  year  is 
taken  as  the  basis  for  finding  the  rate  of  income.  There- 
fore, from  the  mean  value  must  be  taken  one-half  the 
earnings  to  find  the  basis  for  computing  the  rate  of  earn- 
ings for  the  year. 

This  formula  has  long  been  known,1  but  it  has  never 
been  used  in  obtaining  the  rates  of  interest  which  have 
been  published  as  the  rates  earned  by  insurance  assets. 
This  formula  and  the  manner  of  finding  the  earning 
power  of  the  assets  have,  we  believe,  never  been  used 
until  the  following  tables  were  constructed.  In  order 
that  the  method  may  be  fully  understood,  a  typical 
example  will  be  given. 

1  Emory  McClintock  gives*  an  extended  explanation  of  this 
formula  in  The  Insurance  Times  for  January,  1875.  See  also 
W.  D.  Whiting,  The  Insurance  Spectator,  Volume  47,  Page  248, 
and  Walter  C.  Wright,  The  Insurance  Spectator,  Volume  46, 
Page  215. 


Y2  INVESTMENT  EARNINGS. 

REPORT  OF  A  LIFE  INSURANCE  COMPANY. 

Market  value  of  Assets  Decem- 
ber 31,  1903    $52,416,000 

Market  value  of  Assets  Decem- 
ber 31,  1904 56,228,000 

Mean  market  value  for  year  1904 $  54,322,000 

Market  value  over  book  value, 

December  31 ,  1903 $     315,000 

31,1904 585,000 

Increase  in  market  value $  270,000 

Profits  from  sale  of  bonds 221.000 

Profit  and  loss 5,000 

Total  investment  gain $  496,000 

Loss  from  sale  of  real  estate $     46,000 

Loss  from  adjustment  of  book  value. .         92,000 

Total  investment  losses $  138,000 

Investment  fluctuation,  1904 +   358,000 

Accrued  interest, 

December  31,  1903 $    380,000 

31,1904 280,000 

Accrued  interest  1904 —  $  100,000 

Interest  receipts  1904 2,456,000 

$358,000  +  $2,456,000  -  $100,000  =  $2,714,000  total  investment 
earnings. 

Kate  of  earnings=§pS5|^5ps.0=5.1  per  cent. 

In  computing  the  rates  found  in  the  following  tables, 
no  account  has  been  taken  of  the  investment  expenses 
neither  on  total  assets  nor  in  the  rate  on  separate  classes 
of  investments.  When  the  investment  expenses  are  con- 
sidered,  it   will  be   found   that   they   in   many   cases 


INVESTMENT  EARNINGS.  73 

materially  reduce  the  gross  rates  which  have  here  been 
calculated.  However,  because  of  the  difficulty  con- 
nected in  computing  such  costs  of  investing  it  has  been 
thought  best  to  deal  with  them  in  a  separate  chapter. 

The  first  tables  given  are  those  showing  the  rate  of 
earnings  on  total  assets. 


n 


INVESTMENT  EARNINGS. 


EARNING  RATE  OF  TOTAL  ASSETS. 


u 
08 

03 

a 
B 

6 
u 

1 

$ 

1 

43 

3 
.2— 

a  s 
§2 

■f 

1 

'3 

i 
'3 

OS 

a 

c 

§ 

M 
o 
o 

□ 

r-l  1 

a 
S 

OS 

a 

cS 

a 

w  08 
•  3  3 
to  0  3 

8  M 

i 
it 

* 

< 

o 

w 

O 

W 

•"5 

n 

m 

* 

1860 

4.5 
2.4 

6.9 

7.2 

—0.7 
—1.1 

5.4 

5.8 

2.1 
3.5 

1861 

— ST 

"7.'5' 

1862 

5.7 

7.0 

9.2 

13.8 

7.9 

9.0 

4.1 

1863 

5.4 

12.0 

7.8 

8.3 

8.9 

'*2.0' 

6.5 

7.6 

1864 

6.7* 

10.1 

11.9 

6.7 

5.7 

11.2 

20.0 

8.0 

5.1 

1865 

6.7 

5.2 

4.9 

6.4 

4.6 

6.2 

11.1 

5.3 

3.3 

1866 

2.9 

8.7 

8.0 

6.3 

6.6 

9.5 

8.4 

8.0 

9.4 

1867 

7.4 

6.9 

6.6 

5.6 

6.2 

6.8 

9.5 

7.1 

6.0 

1868 

7.4 

6.2 

7.0 

6.6 

8.8 

6.4 

9.2 

6.7 

6.8 

1869 

8.8 

5.6 

7.3 

6.1 

7.6 

6.8 

9.0 

7.1 

7.8 

"V.5 

1870 

6.3 

7.4 

5.5 

6.1 

6.0 

5.5 

3.2 

6.0 

5.6 

2.1 

1871 

7.4 

3.6 

7.0 

6.1 

6.5 

6.6 

3.2 

6.5 

7.1 

4.2 

1872 

8.5 

6.6 

6.3 

6.2 

6.2 

6.6 

6.0 

6.8 

6.6 

6.3 

1873 

7.9 

6.8 

6.8 

6.6 

6.5 

6.3 

5.3 

6.5 

6.1 

5.0 

1874 

7.4 

7.5 

7.3 

7.0 

7.0 

6.7 

7.2 

7.0 

6.8 

6.2 

1875 

7.7 

4.7 

8.1 

5.8 

6.2 

6.7 

6.7 

6.8 

6.9 

5.3 

1876 

7.6 

6.2 

7.1 

5.7 

6.0 

6.4 

6.6 

5.8 

6.4 

5.4 

1877 

6.8 

3.3 

6.8 

4.6 

4.2 

6.6 

6.4 

6.0 

—0.1 

5.8 

1878 

7.0 

5.3 

5.7 

4.9 

4.2 

5.7 

6.4 

4.1 

4.8 

6.7 

1879 

6.7 

5.6 

6.3 

5.8 

5.4 

5.7 

6.3 

6.1 

7.3 

8.1 

1880 

6.5 

5.7 

6.3 

8.1 

6.2 

6.2 

6.4 

6.9 

7.8 

7.5 

1881 

6.2 

6.0 

5.9 

5.6 

4.1 

4.8 

5.4 

6.0 

5.9 

6.1 

1882 

5.8 

6.4 

5.5 

5.4 

5.4 

4.9 

5.1 

6.1 

5.7 

7.2 

1883 

5.9 

5.7 

5.8 

5.5 

5.5 

7.0 

5.8 

6.5 

5.6 

3.1 

1884 

5.5 

4.5 

5.1 

4.9 

5.1 

5.5 

5.5 

5.0 

—0.4 

3.8 

1885 

5.9 

5.0 

6.3 

8.0 

6.3 

4.9 

6.8 

5.1 

2.8 

5.1 

1886 

5.4 

5.7 

5.9 

6.4 

5.4 

5.8 

6.1 

5.4 

5.8 

4.3 

1887 

5.3 

4.7 

5.3 

4.9 

5.3 

4.6 

5.6 

5.0 

6.0 

4.9 

1888 

5.5 

4.7 

4.9 

4.9 

5.0 

4.6 

5.4 

4.9 

4.9 

4.8 

1889 

5.4 

4.8 

5.0 

5.2 

5.0 

4.6 

4.5 

4.2 

4.9 

5.8 

1890 

5.1 

4.9 

6.4 

3.5 

4.2 

6.2 

4.6 

5.3 

4.6 

5.4 

1891 

5.2 

5.1 

5.9 

6.1 

5.8 

5.2 

4.9 

6.2 

5.3 

5.6 

1892 

5.3 

4.8 

5.9 

4.7 

5.0 

6.3 

5.0 

5.0 

5.1 

5.7 

1893 

5.1 

5.1 

4.8 

2.3 

3.9 

4.1 

6.1 

4.6 

4.0 

4.4 

1894 

5.3 

4.8 

5.8 

8.6 

5.2 

2.7 

5.3 

5.9 

5.6 

5.7 

1895 

5.2 

5.1 

5.4 

4.6 

5.0 

3.5 

5.3 

6.2 

4.5 

4.2 

1896 

5.3 

5.0 

5.1 

4.1 

4.9 

2.1 

3.8 

5.0 

4.2 

4.3 

1897 

5.7 

5.0 

5.5 

5.1 

5.5 

4.9 

5.7 

6.0 

4.1 

4.7 

1898 

5.5 

5.0 

5.3 

6.1 

5.1 

5.3 

6.1 

5.2 

5.9 

5.5 

1899 

5.1 

4.8 

4.6 

5.1 

4.6 

4.8 

4.8 

4.7 

4.5 

5.3 

1900 

4.9 

4.7 

5.3 

3.2 

4.9 

5.2 

5.1 

5.8 

5.0 

5.0 

1901 

5.1 

5.3 

4.6 

4.8 

5.2 

5.3 

4.8 

5.8 

4.5 

5.6 

1902 

4.7 

4.9 

3.8 

4.3 

6.6 

5.0 

4.4 

5.1 

3.9 

3.7 

1903 

3.9 

3.9 

3.2 

3.2 

4.5 

2.8 

4.1 

4.9 

3.4 

2.5 

1904 

5.1 

5.3 

5.5 

5.3 

4.7 

6.3 

5.3 

5.8 

5.4 

6.5 

INVESTMENT  EARNINGS. 
EARNING  RATE  OF  TOTAL  ASSETS. 


75 


<&  5 

4& 

—*1 

08 

1 

1 

M 

u 

o 

a 

E 

® 

M 

c3 

0! 

&c5 

5  3 

.28 

"S3 

3  s 

13 
1 

"ex 

I 

m 

Is 

e5 
1 

a 

c 
a 

'3 
■ 
0 
si 

>* 

s 

X 

N 

fc 

fc 

fc 

55 

£ 

Ph 

£ 

1860 

...  . 

6.8 
5.7 

7.7 

6.1 
5.8 
6.5 

5.6 
2.9 

8.6 

5.6 
4.9 
3.4 

5.0 
4.6 

8.2 

5.0 

1861 

3.7 

1862 

"5.1' 

6.3 

1863 

9.7 
10.7 
3.6 
8.0 
7.5 
3.4 
7.1 

7.5 

7.1 
5.6 
7.0 
6.6 
6.7 
6.8 

7.8 
9.2 
4.7 
9.1 
7.6 
8.6 
9.7 

7.1 
4.6 
3.9 
9.6 
5.2 
4.7 
8.2 

7.2 
8.7 
5.4 
5.6 
8.0 
8.0 
6.3 

7.0 
8.1 
8.6 
«.7 
4.6 
5.5 
6.4 

5.7 

1864 

11.6 

1865 

6.8 

1866 

8.6 

1867 

8.9 

1868 

6.7 

1869 

'  9.7* 

"3.6" 

7.5 

1870 

.... 

6.0 

6.3 

6.3 

4.2 

4.4 

8.1 

7.0 

6.2 

5.9 

1871 

7.1 

6.2 

6.8 

8.2 

7.4 

7.2 

7.8 

10.5 

5.8 

7.0 

1872 

7.0 

6.8 

6.2 

6.6 

5.8 

6.8 

7.9 

10.2 

6.3 

6.6 

1873 

7.6 

6.7 

6.9 

8.5 

5.7 

6.9 

8.3 

8.2 

6.4 

7.1 

1874 

7.0 

6.8 

6.7 

6.9 

7.0 

6.3 

8.4 

10.2 

6.0 

7.8 

1875 

7.5 

6.8 

6.9 

7.0 

7.6 

7.2 

8.7 

10.3 

10.1 

6.2 

1876 

7.0 

5.6 

7.9 

6.4 

5.7 

5.8 

7.8 

8.1 

6.1 

7.3 

1877 

7.7 

5.3 

5.4 

2.7 

6.0 

3.9 

7.6 

9.6 

4.3 

6.1 

1878 

7.8 

6.8 

6.0 

4.4 

7.4 

4.9 

6.8 

9.3 

6.4 

5.3 

1879 

7.8 

5.2 

4.9 

5.3 

6.2 

6.0 

7.4 

5.1 

6.9 

4.6 

1880 

7.5 

6.6 

4.4 

6.1 

3.0 

8.4 

5.7 

5.7 

7.3 

6.9 

1881 

7.2 

5.9 

3.6 

5.3 

5.9 

6.1 

5.9 

8.5 

6.0 

6.1 

1882 

6.3 

5.4 

4.2 

5.4 

4.9 

5.4 

5.8 

5.7 

5.7 

6.6 

1883 

6.1 

5.7 

4.9 

5.2 

5.9 

5.6 

6.1 

6.1 

5.6 

6.2 

1884 

6.7 

4.5 

4.1 

6.0 

5.5 

3.9 

5.5 

6.2 

4.4 

5.8 

1885 

6.6 

7.2 

4.7 

5.3 

6.7 

8.1 

5.9 

6.6 

6.7 

6.1 

1886 

5.4 

5.3 

5.3 

3.9 

5.3 

5.7 

5.6 

6.2 

6.7 

6.0 

1887 

6.1 

4.5 

5.2 

6.0 

3.4 

4.2 

5.4 

6.7 

5.4 

5.5 

1888 

5.9 

6.0 

5.2 

8.4 

5.4 

5.5 

5.9 

7.5 

5.6 

5.8 

1889 

6.0 

3.4 

5.1 

5.7 

5.5 

5.1 

6.3 

7.0 

5.8 

6.3 

1890 

6.0 

5.4 

5.0 

4.9 

3.4 

3.4 

5.8 

5.9 

6.7 

5.1 

1891 

5.8 

3.8 

5.4 

5.5 

5.5 

4.2 

5.1 

6.0 

5.7 

5.7 

1892 

5.4 

6.1 

5.4 

5.8 

5.2 

5.5 

5.7 

6.2 

5.6 

5.9 

1893 

5.3 

4.5 

4.9 

4.7 

2.5 

4.4 

5.7 

5.2 

3.8 

5.8 

1894 

5.2 

6.9 

5.4 

5.1 

6.2 

4.3 

5.4 

5.0 

4.6 

5.5 

1895 

5.2 

8.9 

5.4 

5.1 

4.8 

4.7 

5.7 

4.6 

6.2 

5.2 

1896 

5.3 

1.7 

4.1 

4.5 

4.4 

4.5 

5.3 

5.0 

5.9 

4.9 

1897 

5.4 

5.1 

5.4 

3.8 

5.4 

4.6 

5.3 

5.8 

5.9 

5.0 

1898 

5.3 

6.3 

5.3 

4.0 

5.5 

4.8 

5.6 

5.7 

5.8 

6.7 

1899 

58 

6.3 

5.1 

4.0 

5.1 

5.1 

4.6 

5.3 

5.4 

6.1 

1900 

5.4 

5.1 

5.2 

4.4 

4.7 

4.9 

5.0 

5.0 

5.5 

6.3 

1901 

5.4 

5.5 

4.8 

4.2 

4.9 

4.2 

4.5 

0.7 

5.1 

5.5 

1902 

5.1 

4.5 

3.9 

4.7 

4.2 

4.3 

4.0 

6.0 

4.5 

5.0 

1903  5.1 

2.3 

4.4 

4.5 

3.4 

3.1 

4.0 

7.1 

4.4 

5.1 

1904 

5.1 

6.7 

5.1 

4.6 

5.1 

4.2 

5.7 

5.0 

5.6 

5.2 

76 


INVESTMENT  EARNINGS. 
EARNING  RATE  OF  TOTAL  ASSETS. 


4*0 

■*»  w 

"3 

c 

a  s  • 

<D   C8-U> 

If 
M 

3 

4 

E 

© 

> 
a 

■ 

E 

o  © 
5° 

si 

05 

a 

,  o 

* 

£ 

fi 

£ 

m 

H 

t> 

p 

U 

1860 

6.3 
7.1 

5.8 
5.6 
8.1 
7.7 
7.8 
8.8 
7.0 
9.0 
6.2 
17.1 
—1.1 
7.8 
8.6 
3.7 
5.5 

6.7 
5.9 
5.3 
8.6 

11.2 
6.2 

10.7 
9.8 
5.2 
5.3 
9.2 
6.8 
5.8 
6.7 
7.2 
6.5 
7.2 

"7.0 

8.8 
9.3 
14.8 
1.1 
7.2 
6.4 
8.6 
6.0 
3.8 
6.1 
5.5 
6.1 
7.0 
5.7 
7.8 

1861 

1862 

1863 

1864 

6.1 
3.7 
5.6 
6.1 
5.5 
7.1 
6.2 
6.6 
7.4 
7.7 
8.2 
8.0 
—4.5 

1865 

1866 

9.7 
3.0 
4.5 
7.1 
4.8 
2.6 
2.4 
4.3 
5.1 
7.3 
3.6 





1867 

1868 

18.0 

7.8 
7.8 
7.7 
8.0 
8.3 

3.5 
5.3 
4.5 
4.7 
6.7 
5.1 
7.4 
6.1 
7.1 

1869 

1870 

1871 

1872 

1873 

1874 

1875 

1876 

1.5 

1877 

3.4 

0.8 

5.0 

3.3 

6.7 

6.4 

6.1 

5.2 

1878 

6.0 

2.6 

4.0 

2.9 

4.0 

3.7 

5.6 

4.6 

1879 

5.7 

2.3 

6.8 

4.6 

7.8 

4.6 

5.6 

5.7 

1880 

4.9 

25.8 

2.2 

7.9 

5.2 

7.6 

4.9 

7.3 

6.3 

1881 

4.8 

4.6 

2.4 

6.9 

5.7 

6.9 

4.0 

5.3 

5.8 

1882 

6.9 

4.7 

4.0 

2.9 

3.1 

6.3 

5.6 

5.3 

6.3 

1883 

4.8 

0.7 

5.3 

4.5 

5.1 

7.4 

3.2 

5.5 

4.9 

1884 

3.7 

3.8 

5.0 

3.0 

6.6 

2.2 

4.6 

4.7 

1885 

5.7 

4.2 

4.8 

6.4 

4.2 

5.7 

3.8 

8.3 

5.5 

1886 

5.8 

3.3 

4.1 

6.4 

6.2 

4.9 

5.0 

5.1 

1887 

4.4 

3.1 

4.2 

4.9 

4.3 

6.0 

3.7 

3.6 

5.0 

1888 

5.2 

4.9 

4.6 

5.4 

5.1 

6.2 

4.6 

4.9 

5.4 

1889 

4.8 

4.6 

5.0 

4.6 

4.1 

6.0 

4.4 

5.1 

4.8 

1890 

3.5 

3.9 

4.3 

4.9 

4.0 

6.7 

5.1 

5.5 

4.8 

1891 

5.1 

2.8 

5.1 

5.2 

5.3 

6.2 

4.9 

5.1 

4.8 

1892 

4.8 

4.3 

4.8 

5.5 

5.2 

6.8 

4.7 

4.8 

4.8 

1893 

2.9 

1.3 

5.2 

4.1 

2.3 

6.9 

2.4 

3.6 

4.3 

1894 

5.6 

8.3 

5.3 

5.4 

7.3 

6.7 

5.4 

5.3 

4.7 

1895 

4.9 

3.0 

4.8 

4.9 

4.9 

7.0 

4.9 

4.9 

4.3 

1896 

4.5 

4.1 

5.2 

4.3 

7.6 

6.7 

3.8 

5.3 

4.6 

1897 

5.9 

6.7 

5.7 

4.6 

5.4 

6.6 

5.2 

5.3 

4.4 

1898 

7.1 

4.4 

5.9 

5.6 

6.8 

6.5 

5.3 

6.0 

5.1 

1899 

5.0 

6.6 

4.5 

5.3 

5.5 

6.5 

5.3 

5.2 

7.5 

1900 

4.5 

5.5 

6.2 

5.4 

6.0 

6.2 

5.0 

5.1 

4.7 

1901 

3.3 

10.7 

3.0 

5.2 

5.4 

6.4 

5.2 

4.6 

5.0 

1902 

4.4 

10.1 

5.3 

4.3 

4.2 

6.4 

4.9 

5.4 

5.3 

1903 

2.3 

8  1 

3.3 

4.0 

3.5 

6.5 

2.8 

4.7 

5.9 

1904 

6.0 

9.5 

4.8 

5.2 

5.4 

6.5 

4.9 

6.8 

3.7 

INVESTMENT  EARNINGS.  77 

The  figures  tell  their  own  story,  but  it  may  be  well 
to  summarize  some  of  the  leading  facts  contained  in 
the  tables.  The  companies  started  out  with  an  average 
earning  rate  of  about  six  per  cent.,  the  rate  which  we 
have  already  seen  they  were  making  during  the  decade 
just  ended.  Six  made  more  than  six  per  cent,  in  1860, 
and  seven  made  less.  One  of  those  making  less  actually 
had  a  negative  rate,  a  phenomenon  which  is  possible 
with  the  method  which  we  have  adopted  of  finding  the 
rate  of  earning  power.  In  this  particular  case  the  nega- 
tive rate  was  due  to  a  depreciation  in  the  value  of  bonds 
which  that  company  possessed. 

There  was  a  decrease  in  the  earnings  of  1861  com- 
pared with  the  preceding  year.  Eleven  companies  had 
a  lower  rate.  With  some  of  the  companies  the  decrease 
continued  through  1863.  This  decline  in  earnings  was 
due  to  the  effect  of  the  war  in  depressing  the  price  of 
the  securities  which  the  companies  possessed.  The  year 
1863  produced  a  rapid  advance  in  the  earning  power 
of  the  assets.  The  investments  were  being  turned  in 
the  direction  of  the  high  interest-bearing  government 
bonds.  In  the  following  year,  the  highest  earning  rate 
was  reached  which  most  of  the  companies  ever  experi- 
enced. With  large  investments  in  government  bonds, 
with  the  interest  paid  in  gold,  which  was  greatly  appre- 
ciated in  value,  the  rate  made  in  paper  money  was 
high.     The  premium  on  gold  formed  a  source  of  con- 


78  INVESTMENT  EARNINGS. 

siderable  revenue  to  the  companies  for  some  time.  Be- 
sides getting  it  as  interest  on  the  government  bonds, 
policies  had  been  written  on  a  gold  basis,  and  as  the  lia- 
bility on  such  policies  was  a  remote  one  the  companies 
sold  the  gold,  realizing  a  considerable  gain. 

The  decade  of  the  sixties  as  a  whole  shows  rates 
which  are  the  highest  that  the  insurance  companies 
have  secured.  Eleven  of  the  annual  rates  found  in  the 
above  tables  exceed  ten  per  cent. ;  seventeen  are  between 
nine  and  ten  per  cent. ;  twenty-four  between  eight  and 
nine;  thirty-three  between  seven  and  eight;  and  forty 
between  six  and  seven  per  cent.  Thus,  one  hundred  and 
twenty-five  annual  earning  rates  out  of  one  hundred 
and  ninety  possible  cases  were  six  per  cent,  or  above. 

The  decade  of  the  seventies  is  widely  known  as  a 
period  of  extreme  business  depression.  All  values  were 
severely  tested.  Those  companies  which  did  not  have 
their  assets  in  good  shape  felt  the  hard  times  keenly. 
Most  of  them  failed.  Those  which  lived  through  the 
crisis  made  a  remarkable  showing  for  the  period  in  in- 
vestment earnings.  For  all  the  companies  from  1870- 
79,  inclusive,  there  are  only  four  instances  in  which  the 
losses  from  investments  were  serious  enough  to  produce 
a  negative  rate  of  interest  for  the  year.  But  the  earn- 
ing rate  decreased.  In  this  decade  only  six  times  did 
the  rate  go  above  ten  per  cent.  The  Pacific  Mutual  in 
a  part  of  the  country  not  yet  in  close  economic  contact 


INVESTMENT  EARNINGS.  79 

with  the  rest  of  the  country  did  not  feel  the  effects  of 
the  depression,  and  during  four  years  of  the  decade 
earned  more  than  ten  per  cent,  on  its  assets.  Two  other 
companies  made  more  than  ten  per  cent,  for  a  single 
year,  but  as  this  was  followed  in  each  instance  by  a 
negative  rate,  it  shows  that  real  high  earning  power  did 
not  exist.  The  investments  fluctuated  in  value  rapidly 
during  the  decade.  One  year  shows  a  gain  in  market 
values,  the  next  a  loss.  In  general  the  years  1870-71 
show  decreases,  while  1878-89  show  decided  increases 
in  the  market  value  of  the  assets. 

While  about  the  same  proportion  of  the  annual  rates 
from  1870-79  are  above  six  per  cent.,  as  in  the  previous 
decade,  a  much  smaller  proportion  are  below  seven  per 
cent.  The  earning  rate  during  the  last  part  of  the  de- 
cade of  the  sixties  averaged  seven  per  cent.,  or  more. 
The  decade  of  the  seventies  does  not  show  an  average 
rate  above  six  and  one  half  per  cent. 

After  1880,  the  decline  in  the  earning  rate  began  in 
earnest.  Before  this  in  the  seventies  three  companies 
had  gone  through  the  entire  decade  without  a  rate  under 
six  per  cent.,  and  two-thirds  of  the  rates  were  above  six 
per  cent.  In  the  eighties  not  a  single  company  main- 
tained a  level  of  six  per  cent,  unbroken,  and  there  were 
three  companies  which  r.ever  earned  six  per  cent,  dur- 
ing even  a  year.  Between  five  and  six  per  cent,  became 
the  prevailing  rate.     Two  hundred  and  six  out  of  the 


80  INVESTMENT  EARNINGS. 

two  hundred  and  ninety  rates  are  below  six  per  cent. 
In  the  sixties,  nearly  one-half  the  rates  had  been  above 
seven  per  cent.  In  this  decade  twenty  years  later  not 
one-fifteenth  of  the  annual  earning  rates  were  above 
seven  per  cent.  This  shows  in  a  forceful  manner  how 
earnings  were  decreasing.  One  thing  tended  to  keep 
the  rate  high.  As  the  current  market  rate  of  interest 
fell,  the  long-time  securities  which  the  companies  pos- 
sessed appreciated  in  value,  compensating  the  decline  in 
the  market  rate  of  interest.  The  slight  financial  de- 
pression in  1884  set  a  new  low  record.  Twenty-four  of 
the  twenty-nine  companies  lost  that  year  from  a  de- 
crease in  market  values,  seven  made  less  than  four  per 
cent,  on  their  assets,  twelve  under  four  and  one-half 
per  cent.,  and  twenty-four  made  under  five  and  one- 
half  per  cent. 

The  rapid  decline  in  the  earning  rate  continued  in 
the  next  decade.  Ten  per  cent,  earnings  were  a  thing 
of  the  past,  save  in  isolated  cases.  Six  per  cent.,  the  rate 
which  at  one  time  had  been  considered  as  a  minimum 
rate  of  interest,  almost  a  certain  one  for  all  time,  was 
not  reached  but  thirty-six  times  during  the  decade  of 
the  nineties.  Ten  of  these  rates  were  made  by  a  single 
company,  leaving  twenty-six  rates  of  six  per  cent,  to  be 
made  by  twenty-eight  companies  in  ten  years.  In  fact, 
only  two  other  companies  maintained  an  earning  rate 
of  five  per  cent,  throughout  the  entire  decade.     One 


.     UNIVERSITY    I 

V.  OF  / 

X^lT^R^*^  INVESTMENT  EARNINGS.  81 

hundred  and  seven  rates  out  of  two  hundred  and  ninety 
were  below  five  per  cent.  In  general,  the  rates  were  low- 
//  eat  during  1893  and  1894.  In  the  latter  part  of  the 
decade  a  revival  in  business  brought  a  steady  apprecia- 
tion in  the  value  of  securities.  Beginning  with  1896, 
and  continuing  for  five  or  six  years  large  gains  were 
made  from  increases  in  market  values.  The  year  1900 
shows  depreciation  in  values,  a  temporary  check  to  the 
upward  movement  which  went  on  again  during  1901 
and  1902,  to  be  followed  by  a  severe  depression  in 
market  values  during  1903.  During  the  final  year  in- 
cluded in  the  tables  great  gains  from  investment  fluctua- 
tion were  made.  In  that  year  every  one  of  the  twenty- 
nine  companies  save  two  made  a  higher  earning  rate 
than  they  made  in  the  previous  year.  In  the  five  years 
since  1900,  inclusive,  one-sixth  of  the  annual  rates  have 
been  below  four  per  cent,  and  one-half  have  been  below 
five  per  cent.  Eighteen  companies  never  made  six  per 
cent,  once,  and  only  one  company  again  made  six  per 
cent,  throughout  the  ^ve  years. 

This  completes  the  study  of  the  rates  earned  by  total 
assets.  Five  and  one-half  decades  have  been  covered. 
In  summarizing,  we  see  that  the  rates  from  1850  to 
1859  averaged  somewhat  below  six  per  cent.  During 
the  sixties  the  rate  rose  rapidly  until  more  than  a 
seven  per  cent,  earning  rate  was  prevailing,  and  eight 

to  twelve  per  cent  was  not  uncommon.      Since  that 
6 


82  INVESTMENT  EARNINGS. 

time  the  earning  rate  has  declined  more  or  less  unstead- 
ily, but  nevertheless  surely  downward.  The  early 
seventies  had  a  six  and  one-half  per  cent,  earning,  the 
latter  part  of  the  decade  was  characterized  by  a  six  per 
cent.  rate.  Five  and  one-half  per  cent,  was  a  fair 
average  for  the  eighties  and  five  for  the  nineties.  Since 
1900  four  and  one-half  per  cent,  has  been  common, 
though  there  have  been  sharp  fluctuations. 

Of  almost  equal  interest  to  the  rate  of  earning  power 
of  the  total  assets  is  the  rate  earned  by  particular  classes 
of  assets.  It  is  unfortunate  that  the  state  reports  do 
not  give  the  income  account  of  each  class  of  securities 
designated  in  the  previous  chapter.  However,  the  re- 
ports do  itemize  the  income  coming  from  large  classes 
of  assets.  The  income  from  real  estate,  mortgages, 
bonds,  and  stocks  has  been  returned,  divided  under  these 
heads  almost  from  the  start.  From  the  previous  chap- 
ter what  sort  of  securities  go  to  make  up  the  bonds  and 
stocks  of  each  company  may  be  seen.  Tables  will  now 
be  given  compiled  in  the  same  manner  as  the  ones  just 
given  for  total  assets  which  show  the  earning  rate  of 
real  estate,  mortgage  loans,  and  bonds  and  stocks. 

The  real  estate  asset  will  be  discussed  first.  As  was 
said  earlier,  no  taxes,  no  cost  of  repairs,  no  cost  of  in- 
vestment or  expense  has  been  considered  in  finding  out 
what  the  earning  power  of  real  estate  has  been.  In  the 
following  tables  the  same  companies  are  included  as 
were  embraced  in  the  preceding  tables. 


INVESTMENT  EARNINGS.  83 

EARNING  RATE  OF  REAL  ESTATE. 


6 

3  . 

a 

d 

a 
1 

a 

08 

.Jj 

■Ss 

A 

a 

o 

jj 

la 

4 

2 

Kg 

1 

03 

i 

■ 

6 

n 

03 

CS^S 

6o 

u 
c8 

a 

M 

2  ^ 
2S 

3 

a1 

6 
o 

a  <a 

a 

OJ 

>* 

< 

ff 

O 

m 

0 

W 

•-5 

m 

m 

8 

1860 

1.8 
1.0 

16.7 
9.1 
9.1 
9.1 
9.1 

1861 

1862 

1863 

7.3 
3.3 

2.1 
0.0 

1864 

... 

.... 

•  • . .. 

...... 

1865 

5.1 
5.4 
7.4 
6.0 
4.5 
0.6 

18.2 
0.0 
4.0 
5.3 
7.4 
6.4 
5.6 

1866 

10.0 
1.8 
3.6 
4.0 
4.5 
4.9 

6.8 
3.9 
0.6 

0.0 

1867 

. 

1868 

1869 

. 

1870 

4.9 
5.3 

1871 

1.2 

.... 

.... 

1872 

4.9 
5.0 

1.0 

1.5 

4.3 
5.2 

2.4 
3.5 

5.0 
0.0 

1873 

- 

1874 

4.5 
4.5 
4.1 

2.8 
3.0 

3.5 
4.2 
5.9 

9.1 
1.9 

2.8 
3.9 
3.4 

2.0 
3.2 

2.7 

1875 

1876 

8.3 

8.9 

1877 

6.2 

1.2 

1.0 

9.9 

1878 

2.1 

2.6 

4.7 

4.7 

...... 

2.8 

2.3 

8.4 

13.9 

1879 

2.8 

2.0 

4-7 

3.0 

4.5 

3.3 

7.2 

14.7 

1880 

3.4 

2.7 

4.4 

—7.5 

—6.5 

4.4 

3.9 

10.4 

7.1 

1881 

2.8 

3.6 

5.4 

4.3 

1.1 

3.6 

1.2 

5.6 

17.1 

1882 

3.7 

6.5 

4.8 

3.6 

1.8 

4.8 

6.4 

6.3 

14.0 

1883 



1.9 

4.4 

4.9 

4.8 

1.2 

3.8 

5.4 

7.1 

—0.5 

1884 

3.0 

4.5 

4.6 

6.2 

1.3 

3.3 

5.9 

—13.2 

6.8 

1885 

4.1 

4.7 

4.6 

6.2 

0.4 

3.3 

6.7 

9.1 

6.1 

1886 

•••*.. 

4.8 

4.0 

3.3 

9.6 

0.5 

3.3 

8.4 

5.9 

6.3 

1887 

5.2 

4.1 

2.4 

13.1 

3.7 

27.1 

9.4 

8.8 

3.1 

1888 

4.1 

2.3 

2.7 

4.1 

4.4 

5.3 

1.6 

—3.5 

3.9 

1889 

2.0 

3.5 

1.0 

3.4 

4.0 

5.4 

—4.2 

2.0 

0.7 

6.0 

1890 

3.6 

4.2 

4.2 

3.2 

3.1 

5.5 

0.2 

33.1 

—4.5 

2.8 

1891 

3.6 

4.4 

4.6 

3.9 

4.2 

5.5 

1.7 

23.1 

3.9 

2.3 

1892 

2.4 

4.5 

4.4 

6.3 

4.7 

40.2 

6.4 

5.1 

8.4 

1.6 

1893 

2.8 

3.8 

2.4 

3.5 

5.8 

3.3 

4.3 

1.4 

5.4 

1.8 

1894 

6.3 

2.4 

4.0 

4.2 

6.4 

2.9 

7.6 

6.4 

0.0 

6.9 

1895 

7.3 

7.2 

3.6 

4.0 

6.0 

4.2 

7.3 

8.4 

—3.6 

3.4 

1896 

5.9 

3.6 

3.2 

4.5 

6.3 

5.6 

5.4 

7.4 

3.3 

4.2 

1897 

8.5 

4.5 

3.3 

4.6 

6.1 

5.1 

7.3 

5.6 

4.4 

1.0 

1898 

13.9 

4.8 

3.0 

5.0 

5.8 

5.5 

7.4 

5.0 

5.2 

4.9 

1899 

10.8 

5.3 

4.1 

5.4 

6.2 

3.0 

8.2 

4.0 

4.5 

5.1 

1900 

10.0 

6.1 

3.3 

5.5 

6.6 

4.9 

8.6 

5.6 

7.4 

4.7 

1901 

9.7 

6.4 

3.8 

5.3 

4.2 

5.6 

8.9 

9.3 

5.7 

5.6 

1902 

7.2 

6.3 

4.0 

5.1 

8.0 

6.0 

8.4 

6.2 

4.5 

5.3 

1903 

7.4 

7.4 

4.7 

5.2 

8.4 

6.1 

7.5 

5.2 

3.9 

5.3 

1904 

6.9 

7.6 

5.0 

3.8 

7.6 

4.7 

5.8 

7.0 

3.9 

3.7 

84:  INVESTMENT  EARNINGS. 

EARNING  RATE  OF  REAL  ESTATE. 


8 

5  3 

3 

3 

i 
"3  a 

3 

■ 
a 
o 

§ 

a 

►I 

u 
O 

g 

B 

At 
f  * 

o 

6 
1 

c 

a 

m 

'a 

tH 

9 

s 

M 

fc 

fc 

fc 

fc 

£ 

£ 

PL, 

1860 

1.4 
1.2 

6.2 
3.8 

1861 

6.0 
6.0 
5.6 
5.7 
5.7 
6.2 
4.2 

1862 

1868 

3.8 





1864 

1865 

3.5 
6.4 
7.4 
6.7 
7.4 
4.0 

1.2 
2.3 
2.0 
2.5 
2.2 
2.1 
2.1 
2.1 

0.0 
0.0 
0.0 
0.0 
9.1 
0.0 
7.7 
7.1 

1866 

1867 

1868 

1869 

5.3 

5.6 
2.8 
1.7 
1.5 

1870 

0.7 
2.9 
3.2 

1871 

4.9 
5.5 

4.8 
6.3 

1872 

4.6 

1873 

2.7 

2.0 

7.7 

6.6 

4.7 

3.2 

0.6 

1874 

1.7 
1.6 

1.9 
1.5 

7.1 
5.9 

3.5 
2.4 

4.7 
3.4 

3.0 
2.0 

1875 

25.3 

1876 

1.8 

0.8 

5.9 

3.4 

2.7 

1.4 

—4.1 

0.6 

1877 

1.2 

—4.5 

1.0 

3.7 

—6.4 

0.9 

3.2 

0.6 

1878 

1.2 

0.3 

1.5 

4.3 

1.8 

0.6 

7.0 

1.3 

2.0 

1879 

2.3 

0.1 

1.9 

4.9 

1.9 

0.5 

—4.7 

3.5 

4.2 

1880 

2.9 

0.1 

3.6 

5.0 

7.1 

0.4 

0.0 

1.4 

6.7 

1881 

3.2 

—3.6 

4.0 

5.5 

3.3 

0.5 

11.5 

3.7 

7.0 

1882 

3.1 

2.2 

4.0 

5.3 

3.1 

0.5 

—4.0 

3.8 

5.6 

1883 

2.8 

2.3 

4.4 

5.0 

3.2 

3.4 

—0.7 

8.0 

5.1 

1884 

2.7 

2.3 

4.0 

5.0 

2.4 

3.1 

0.8 

0.7 

6.2 

1885 

3.4 

1.7 

3.3 

5.4 

1.6 

2.6 

5.0 

4.2 

1886 

3.7 

1.2 

3.7 

5.3 

1.2 

3.2 

4.0 

4.4 

1887 

3.9 

1.8 

3.4 

4.7 

1.3 

—7.5 

3.9 

3.9 

1888 

3.5 

1.5 

4.2 

5.0 

1.1 

5.0 

1.6 

4.3 

3.8 

1889 

1.8 

3.5 

1.4 

5.6 

5.7 

3.6 

6.4 

2.6 

1.7 

4.4 

1890 

5.2 

1.1 

4.0 

5.7 

2.5 

6.0 

0.6 

1.6 

4.2 

1891 

2.6 

5.1 

2.9 

3.3 

4.9 

4.4 

6.1 

0.3 

3.1 

4.5 

1892 

3.0 

4.9 

4.3 

2.7 

5.0 

4.8 

6.0 

0.9 

3.4 

4.0 

1893 

2.5 

4.6 

2.8 

2.3 

4.2 

3.0 

5.6 

2.2 

2.1 

2.6 

1894 

2.7 

4.4 

3.9 

2.1 

4.2 

4.8 

6.7 

2.0 

3.8 

3.7 

1895 

0.0 

3.4 

3.2 

3.4 

4.4 

4.5 

8.8 

2.0 

4.1 

—0.5 

1896 

—0.6 

—2.7 

-5.0 

3.8 

4.6 

—6.6 

8.4 

3.0 

3.0 

—3.3 

1897 

-0.8 

—6.2 

-0.2 

4.0 

5.0 

4.5 

8.8 

3.8 

4.5 

3.5 

1898 

—0.2 

—2.4 

3.1 

5.4 

5.0 

3.9 

9.1 

3.9 

5.8 

4.2 

1899 

4.0 

5.6 

5.2 

6.0 

5.4 

5.4 

9.2 

2.0 

6.4 

4.9 

1900 

4.0 

4.6 

—1.0 

7.6 

6.0 

5.8 

10.8 

2.6 

8.8 

6  6 

1901 

7.0 

4.5 

6.5 

7.2 

7.7 

6.3 

10.9 

-25.0 

9.5 

8.6 

1902 

5.0 

4.7 

6.6 

7.5 

7.6 

7.6 

10.7 

4.5 

7.1 

9.5 

1903 

4.4 

4.9 

6.6 

7.9 

8.1 

7.6 

11.6 

5.7 

6.6 

5.0 

1904 

4.5 

4.8 

5.6  8.0 

8.2 

7.5 

10.2 

5.0 

1  7.0 

5.6 

INVESTMENT  EARNINGS. 
EARNING  RATE  OF  REAL  ESTATE. 


85 


•e+J 

"3 

"5 

CO 

a 

1 

—  -   / 

C  o3  3 

fa 

.2 

■ 

i 

■ 

1 

E 

a 

2° 

3 

3 

[3 

i 
'a 

3 
be 

.  a 
si" 

v> 

eS 

>* 

Oh 

£ 

£ 

CO 

H 

p 

P 

P 

£ 

1860 

1861 

1862 

1863 

1864 

1865 

1866 

1867 

8.0 
11.5 
11.1 

1868 

1869 

1870 

7.1 

1871 

4.0 

1872 

1873 

6.5 
8.2 
7.6 

1.6 

1.7 

1.7 

1874 

1.4 
1.2 

0.7 

1.1 

.0 

3.0 
6.3 

—1.1 

5.3 

4.7 

1875 

0.9 
4.6 
2.8 
0.9 

6.3 

1876 

1877 

1878 

1879 

1.8 
6.5 

2.4 

1880 

0.2 
0.8 

1881 

1882 

1.0 
1.2 
1.4 

—2.6 

11.5 

2.3 

33.8 

1.2 

1883 

1884 

1885 

1.9 
1.7 

5.5 

3.8 

2.9 

—5.7 

1.6 

1886 

1887 

1.4 

4.0 

1.4 

0.5 

3.2 

1.4 

3.0 

3.8 

1888 

0.9 

1889 

0.1 

9.0 

1.7 

12.3 

—2.1 

1.3 

—3.8 

3.4 

1890 

1.4 

2.3 

5.3 

2.2 

8.2 

2.0 

14.7 

3.0 

1891 

2.1 

.... 

5.5 

—2.5 

1.4 

2.1 

—50.9 

2.2 

1892 

1.4 

14.7 

5.8 

3.0 

5.5 

2.1 

0.0 

2.2 

1893 

2.0 

5.0 

5.0 

3.3 

—0.8 

3.5 

2.2 

—18.0 

2.7 

1894 

1.5 

10.9 

5.5 

6.5 

14.8 

2.7 

3.0 

1.8 

1.7 

1895 

1.3 

11.3 

6.0 

6.1 

4.3 

0.0 

2.8 

5.7 

2.5 

1896 

1.1 

10.3 

6.4 

—1.4 

1897 

1.0 

2.7 

6.5 

5.2 

6.0 

2.5 

2.9 

—2.4 

1.1 

1898 

1.4 

14.4 

6.2 

4.2 

3.2 

2.9 

5.1 

4.0 

1899 

1.3 

18.7 

5.7 

6.1 

6.2 

4.1 

2.0 

4.9 

11.0 

1900 

2.2 

13.8 

1901 

3.3 

33.3 

—4.9 

6.4 

—2.7 

15.0 

3.1 

1.9 

5.6 

1902 

4.1 

20.3 

7.2 

7.0 

11.7 

4.2 

9.6 

5.9 

1903 

4.0 

13.0 

6.1 

6.8 

7.8 

6.6 

4.6 

18.3 

7.2 

1904 

1  3.7 

16.2 

2.9 

7.6 

8.8 

12.8 

4.9 

12.2 

1  2.4 

86  INVESTMENT  EARNINGS. 

The  statistics  show  in  general  a  fair  average  earning 
rate  on  real  estate  during  the  sixties.  In  the  seventies, 
when  the  companies  had  become  the  possessors  of  large 
amounts  of  property  secured  through  foreclosure  of 
mortgage  loans,  the  earning  rate  of  real  estate  com- 
pares unsatisfactorily  with  the  rate  made  on  total  assets. 
The  very  fact  that  foreclosure  was  necessary  indicated 
that  the  property  so  secured  was  not  productive.  In 
numerous  instances  the  companies  suffered  a  loss  in 
market  value  so  great  that  negative  rates  of  earning 
power  are  not  uncommon  during  the  decade  of  the 
seventies  and  the  one  following.  From  1870  to  1889 
inclusive,  one  hundred  and  sixty-four  times  was  the 
earning  rate  of  real  estate  under  three  per  cent.  The 
early  nineties  did  not  bring  any  improvement  in  the 
earning  rate.  In  the  entire  decade  of  the  nineties, 
eighty-seven  of  the  two  hundred  and  ninety  annual 
earning  rates  were  again  below  three  per  cent. 

During  the  last  ten  years  real  estate  has  been  making 
a  better  gross  rate  steadily.  Real  estate,  in  common 
with  other  things,  has  experienced  a  rise  in  price.  This 
has  made  a  better  earning  power  through  a  gain  in 
market  values.  Cities  have  been  growing  rapidly  and 
the  real  estate  which  the  companies  had  obtained  through 
foreclosure  of  mortgages  has  been  sold  at  such  a  price 
that  the  companies  have  been  enabled  to  make  a  gain 
from  the  sale.  The  gross  earning  rate  has  risen 
rapidly.     Only  ten  rates  for  all  the  companies  since 


INVESTMENT  EARNINGS.  87 

1900,  inclusive,  have  been  as  low  as  three  per  cent. 

When  a  comparison  is  made  of  the  rate  earned  by 
real  estate  with  the  rate  earned  by  the  total  assets  year 
by  year  for  each  company,  it  will  be  seen  that  nearly 
every  company  has  suffered  from  holding  real  estate.. 
If  such  a  comparison  be  made,  it  is  found  that  five 
hundred  and  ninety-seven  of  the  annual  rates  on  real 
estate  are  below  the  rates  for  the  same  years  earned  by;  | 
the  total  assets.  Only  three  hundred  and  nineteen  of 
the  real  estate  rates  are  higher  than  the  total  asset 
earning  rate. 

So  far  in  discussing  the  low  rate  earned  by  real 
estate,  reference  has  been  made  only  to  real  estate 
secured  through  foreclosure  of  mortgage  loans  as  a 
source  of  loss  to  the  companies.  Undoubtedly  such 
real  estate  has  been  a  loss  to  the  companies,  but  as  such 
it  should  be  considered  in  connection  with  the  rate 
earned  by  mortgage  loans.  Most  of  the  real  estate 
which  has  made  up  the  large  total  of  such  an  asset  con- 
sists of  home  office  buildings  and  other  buildings  neces- 
sary for  the  transaction  of  the  business  of  the  companies. 
Real  estate  necessary  for  the  business  of  the  company 
is  the  only  real  estate  allowed  by  most  of  the  states  for 
the  companies  to  hold.  However,  under  this  permis- 
sion, buildings,  as  we  have  already  seen,  have  been 
erected  of  which  only  a  small  part  is  used  by  the  com- 
pany. These  buildings  have  in  the  main  been  erected 
for  advertising  purposes.    As  such  they  may  be  success- 


gg  Investment*  earnings. 

ful,  but  despite  the  liberal  allowance  of  rent  which  the 
company  pays  to  itself  for  the  nse  of  its  own  office 
building,  as  an  investment  to  secure  good  earning  rates 
these  office  buildings  have  been  failures.  The  invest- 
ment of  capital  in  large  office  buildings  is  at  best  an 
investment  attended  by  unavoidable  risk  when  those 
buildings  are  erected  with  but  one  purpose  in  view, 
namely,  to  get  a  good  return  on  the  investment.  When 
erected  with  a  double  purpose  in  view,  the  earning  rate 
of  real  estate  given  in  the  preceding  tables  is  the  re- 
sult. What  might  be  obtained  from  real  estate  invest- 
ments if  the  companies  were  to  enter  upon  a  definite 
policy  in  regard  to  them  is  not  known.  We  have  already 
noticed  in  a  previous  chapter  that  the  French  com- 
panies, when  forced  by  circumstances  to  invest  their 
funds  in  real  estate,  did  so  very  successfully  from  the 
earning  standpoint.  Certainly  companies  in  this 
country  would  have  invested  with  different  results  if 
they  had  not  had  the  advertising  in  view  which  a  huge 
and  expensive  building  is  thought  to  give  them. 

Of  far  more  importance  than  the  earning  rate  of 
real  estate  is  that  of  mortgage  loans.  Mortgages  have 
formed  so  large  a  proportion  of  the  total  assets,  and 
as  an  asset  they  have  such  a  homogeneous  character  that 
the  rate  of  earning  power  realized  on  this  asset  is  of 
great  interest.  The  following  tables  have  been  com- 
piled in  the  same  manner  as  the  preceding  ones  and 
again  for  the  same  companies. 


INVESTMENT  EARNINGS. 
EARNING  RATE  OF  MORTGAGE  LOANS. 


u 

1 

e8 

a 

© 

£ 

i 

u 
© 

3  as 

5  3 

6 
3 

CO 

'3 

c 

4 

"3 

1 

e 

© 

a 

0 

M 

8 

g 

a 

e  co 

■gw 

0 
1 

9 

to 
a 

CO 

09 

eo  o& 

a 
.  * 

©  0. 

>H 

* 

« 

o 

W 

O 

w 

»-j 

R 

m 

M 

1860 

8.2 
7.3 
10.3 
9.9 
3.9 

1861 

"«C» 

6.1 
7.0 

"8.7' 

6.4 
7.5 
6.5 

'8.'8' 
6.7 
5.5 
9.5 

1862 



's.T 

5.0 

6.5 

"e.o 

7.0 

1863 

1864 

"h'.o 

1865 

"8.6* 

7.8 

9.8 

"e.i 

10.0 

4.2 

7.5 

5.8 

1866 

3.1 

7.5 

5.1 

6.7 

6.1 

6.4 

5.1 

. . . . 

1867 

3.9 

6.1 

"8.5* 

6.7 

6.8 

8.0 

7.9 

6.7 

.... 

1868 

8.0 

8.0 

8.0 

7.1 

7.2 

16.4 

'*5.'3* 

5.1 

7.5 

.... 

1869 

7.6 

8.8 

8.2 

7.2 

7.5 

6.8 

.  . .. 

6.8 

7.1 

1870 

10.1 

11.7 

8.3 

7.3 

8.0 

7.7 

8.3 

7.5 

6.7 

1871 

8.9 

9.9 

7.5 



7.0 



7.1 

8.5 

6.9 

.... 

1872 

11.6 

7.3 

6.8 

...... 

7.2 

...... 

11.9 

8.3 

8.9 

.... 

1873 

12.2 
10.3 

7.5 
7.5 

8.2 
7.8 

7.3 

7.0 

12.2 
3.7 

8.0 

8.7 

1874 

"lie 

... 

1875 

10.8 

78 

7.1 

"6.9' 

6.3 

6.6 

1876 

9.7 

8.5 

8.6 

7.2 

7.6 

7.9 

7.3 

8.7 

7.2 

1877 

9.3 

6  5 

8.4 

7.6 

7.4 

6.9 

6.9 

5.4 

6.6 

1878 

9.0 

6.7 

7.4 

6.8 

7.0 



7.1 

5.7 

6.3 

6.7 

1879 

8.1 

71 

4.4 

7.5 

6.9 

6.7 

7.4 

6.8 

7.2 

1880 

8.0, 

6.8 

7.5 

6.2 

6.5 



7.6 

5.9 

5.9 

6.2 

1881 

7.7' 

69 

7.1 

6.1 

6.7 

6.3 

6.0 

7.0 

6.0 

1882 

7.0 

6.7 

6.6 

6.0 

6.3 

5.9 

4.2 

7.3 

6.4 

1883 

6.7 

6.2 

6.5 

6.0 

6.2 



6.0 

5.9 

7.9 

6.0 

1884 

6.7 

5.1 

6.4 

6.6 

6.2 



5.8 

6.0 

7.1 

5.5 

1885 

6.5 

5.8 

6.2 

4.5 

5.6 



5.7 

5.4 

7.0 

5.4 

1886 

6.4 

6.5 

6.2 

5.1 

5.3 

5.9 

5.1 

9.1 

5.1 

1887 

6.6 

5.7 

6.2 

4.8 

5.5 

18.5 

6.1 

5.1 

8.1 

6.1 

1888 

6.6 

5.7 

6.1 

7.3 

5.3 

15.6 

6.0 

5.1 

7.7 

5.6 

1889 

6.5 

5.9 

6.0 

7.4 

5.4 

12.6 

6.1 

4.5 

8.2 

6.0 

1890 

6.3 

6.0 

6.1 

8.1 

5.3 

11.4 

6.2 

5.1 

7.9 

5.6 

1891 

6.5 

5.9 

6.1 

6.6 

5.1 

7.6 

6.2 

4.9 

8.0 

5.5 

1892 

6.3 

5.9 

6.0 

4.3 

5.1 

7.2 

6.1 

5.1 

7.7 

5.6 

1893 

6.3 

6.2 

6.0 

4.5 

5.3 

6.8 

6.1 

4.9 

7.4 

5.2 

1894 

6.4 

5.7 

6.0 

4.9 

5.1 

6.2 

5.3 

5.1 

7.7 

5.3 

1895 

6.4 

5.9 

6.0 

4.3 

5.1 

6.7 

5.8 

5.1 

8.0 

4.9 

1896 

6.2 

5.7 

6.1 

4.9 

5.1 

6.3 

5.7 

5.1 

7.5 

5.1 

1897 

6.3 

5.5 

6.0 

4.7 

5.2 

6.3 

4.8 

4.9 

4.1 

5.3 

1898 

6.8 

5.1 

5.8 

5.2 

5.1 

5.5 

5.3 

5.3 

5.1 

5.2 

1899 

5.9 

5.3 

6.6 

4.9 

5.0 

6.4 

5.2 

4.8 

5.1 

4.9 

1900 

5.7 

4.8 

5.7 

4.6 

5.2 

5.5 

5.4 

4.8 

5.1 

5.3 

1901 

5.4 

4.9 

5.4 

4.4 

5.5 

6.3 

5.3 

4.8 

5.0 

5.2 

1902 

5.1 

4.9 

5.3 

4.6 

4.9 

6.5 

5.6 

4.9 

4.7 

5.2 

1903 

5.2 

4.6 

5.2 

4.2 

4.9 

4.5 

5.3 

4.8 

4.7 

5.2 

1904 

5.4 

5.1 

1  5.0 

4.4 

4.8 

4.6 

5.2 

4.8 

4.8 

5  2 

90  INVESTMENT  EARNINGS. 

EARNING  RATE  OF  MORTGAGE  LOANS. 


?1 

e3 

•0 
a 
08 

i 

0 

i 

M 

1 

Si   5 

2a 

3 

u 

B 

"eS 

be 

0 

•Cm 

0 
'5 

d 

| 

8 

H 

9 

m 

m 

fc 

& 

K 

K 

£ 

Ph 

£ 

1860 

8.6 
6.7 
7.9 

7.2 
6.4 
7.7 
6.7 
7.3 

9.0 
8.0 
6.3 
8.7 
9.0 
8.3 
7.5 
8.0 
8.6 
9.4 

6.5 
6.1 
6.3 
5.6 
5.1 
5.3 
6.4 
8.0 
4.5 

6.8 

7.1 
5.7 
10.4 
6.7 
6.2 
7.7 
5.4 
7.0 
7.5 
7.0 

1861 

1862 

'  7*3" 
4.1 
6.5 
7.3 
9.8 

1863 

1864 

7  8 

1865 

4  4 

1866 

1867 

1868 

7.2 

8.1 

1869 

7.1 

2.3 

1870 

7.3 

8.4 

10.0 

7.0 

8.5 

8.6 

12.2 

1871 

10.0 

7.3 

8.6 

9.9 

7.7 

8.0 

,  , 

5.8 

1872 

8.7 

6.8 

8.6 

9.2 

8.1 

7.5 

12.3 

1873 

11.1 

6.9 

8.2 

2.4 

8.1 

8.6 

... 

7.5 

1874 

9.4 

7.2 

7.4 

9.2 



9.3 



6.6 

1875 

7.1 

6.6 

7.4 

7.5 

6.9 

9.8 

7.0 

7.9 

1876 

7.0 

6.6 

7.2 

6.8 

6.9 

9.8 

7.2 

8.7 

1877 

6.9 

6.9 

3.8 

6.5 

6.4 

9.6 

13.3 

7.4 

6.9 

1878 

6.6 

6.4 

6.8 

5.7 

6.3 

9.1 

9.4 

6.6 

7.2 

1879 

ii.i 

6.9 

7.0 

6.1 

6.1 

6.5 

9.3 

11.8 

6.5 

5.5 

1880 

10.3 

6.7 

6.5 

6.1 

5.9 

6.3 

8.2 

5.2 

6.3 

7.3 

1881 

9.4 

6.6 

6.7 

4.7 

5.3 

5.7 

7.5 

85 

6.1 

7.3 

1882 

9.0 

6.2 

6.1 

6.4 

5.8 

6.1 

6.9 

9.2 

5.9 

7.4 

1883 

7.8 

6.0 

5.6 

6.3 

5.2 

6.1 

6.5 

8.2 

5.6 

7.2 

1884 

8.0 

5.8 

5.8 

7.1 

4.7 

5.9 

6.6 

8.5 

5.5 

6.8 

1885 

7.6 

5.8 

6.3 

6.9 

5.2 

5.5 

6.4 

9.3 

5.7 

6.9 

1886 

6.7 

5.7 

6.3 

6.7 

5.4 

5.8 

65 

9.0 

5.9 

6.9 

1887 

7.4 

5.5 

6.4 

6.9 

5.2 

5.2 

6.1 

9.1 

6.2 

6.9 

1888 

7.3 

5.9 

6.2 

6.9 

5.7 

5.5 

6.2 

9.6 

6.1 

7.0 

1889 

7.2 

4.0 

6.2 

6.9 

5.9 

6.0 

6.4 

9.0 

6.2 

7.2 

1890 

5.2 

6.0 

7.1 

5.9 

5.5 

5.9 

7.8 

6.2 

6.8 

1891 

6.2 

5.5 

6.0 

6.3 

5.7 

5.5 

5.8 

8.4 

6.2 

6.9 

1892 

6.5 

5.4 

6.0 

6.7 

5.4 

5.2 

6.0 

9.7 

6.3 

6.6 

1893 

6.5 

4.6 

5.6 

5.8 

5.7 

5.7 

5.8 

7.9 

6.2 

6.6 

1894 

6.2 

5.5 

5.9 

5.9 

5.6 

5.4 

5.8 

8.3 

6.2 

6.2 

1895 

6.1 

5.5 

6.2 

6.1 

4.9 

5.0 

5.7 

7.0 

6.1 

6.3 

1896 

6.5 

5.3 

6.0 

5.0 

4.8 

5.2 

5.2 

6.3 

5.3 

6.3 

1897 

6.6 

5.2 

5.9 

2.4 

4.2 

4.9 

5.5 

6.6 

5.7 

6.5 

1898 

6.4 

5.3 

5.9 

4.9 

4,7 

4.9 

5.4 

6.0 

5.3 

6.5 

1899 

6.0 

5.0 

5.7 

4.2 

4.4 

4.8 

5.0 

5.5 

5.4 

6.2 

1900 

5.8 

4.8 

5.5 

5.4 

4.7 

4.7 

4.9 

5.4 

5.3 

5.9 

1901 

5.6 

4.7 

5.1 

4.8 

4.3 

4.5 

4.8 

5.4 

5.4 

5.8 

1902 

5.3 

4.6 

5.0 

5.2 

4.4 

4.4 

4.6 

6.0 

5.3 

5.6 

1903 

5.3 

4.6 

5.1 

5.4 

4.2 

4.3 

4.6 

5.2 

5.2 

5.5 

1904 

5.3 

4.7 

5.1 

5.4 

4.2 

4.5 

4.8 

5.3 

5.2 

5.4 

INVESTMENT  EARNINGS. 
EARNING  RATE  OF  MORTGAGE  LOANS. 


91 


c 

cj 
01 

-4J  "d 

B  B  . 
<u  -  J. 

B  ti 
gw 

3 

B 

I 

1 

d 

08 

i 

i 

Jl 

"3 

03 

aw 

a 
o 

•a 

tc 

.   a 

•ST 

1 

i» 

£ 

Pm 

PU 

W 

h 

P 

E> 

& 

£ 

1860 

1861 

7.7 
7.7 
6.0 
8.7 
8.0 
7.0 
7.3 
6.7 
7.0 
7.1 
6.8 
6.8 
7.2 
6.7 
6.7 
6.4 
6.8 
4.6 
5.7 

1862 

1863 

1864 

6.6 

8.5 
6.8 

*7.'l" 
7.0 
6.9 

6.4 

1865 

1866 

1867 

8.1 
8.9 
8.8 
8.6 
6.5 
7.5 
9.1 
8.3 
6.1 
5.8 
6.1 

5.6 

1868 

1869 

7.9 

7.0 

1870 

1871 

1872 

1873 

1874 

9.8 

9.0 

10.4 

7.9 

7.1 

"5.6* 

8.8 
7.8 

8.2 

1875 

5.5 
6.4 
6.4 
6.6 
6.3 

1876 

1877 

1878 

1879 

4.0 

1880 

5.5 

9.1 

5.0 

7.4 

8.7 

5.4 

6.0 

1881 

5.8 

5.9 

6.5 

8.6 

8.1 

5.7 

5.6 

5.9 

1882 

4.5 

5.9 

6.2 

8.3 

7.5 

5.8 

5.8 

5.9 

1883 

5.6 

5.6 

6.2 

6.2 

7.7 

7.7 

5.1 

5.6 

1884 

5.8 

5.3 

5.2 

8.3 

7.2 

9.1 

5.3 

5.7 

1885 

5.9 

5.3 

7.8 

8.1 

7.4 

—0.2 

5.6 

6.5 

1886 

6.1 

5.2 

5.0 

5.7 

1887 

6.1 

5.3 

5.0 

5.0 

7.3 

7.7 

5.7 

5.0 

5.3 

1888 

6.2 

4.8 

5.4 

1889 

6.2 

5.7 

5.5 

5.0 

7.5 

7.4 

5.5 

4.9 

5.3 

1890 

6.2 

6.3 

4.9 

5.1 

1891 

6.3 

6.7 

5.8 

5.4 

7.1 

7.4 

5.5 

5.7 

5.1 

1892 

6.4 

5.3 

5.7 

5.4 

6.6 

5.3 

5.2 

5.2 

1893 

6.3 

5.4 

6.0 

5.9 

6.2 

7.8 

6.1 

5.1 

5.1 

1894 

6.6 

6.2 

6.0 

4.7 

6.6 

7.7 

5.6 

5.1 

5.2 

1895 

6.2 

6.2 

5.4 

5.0 

6.1 

7.7 

6.0 

5.0 

4.9 

1896 

5.3 

5.9 

5.5 

5.1 

5.4 

7.6 

6.2 

5.1 

5.1 

1897 

5.9 

6.1 

5.4 

4.7 

5.7 

7.7 

6.1 

5.1 

5.4 

1898 

5.8 

5.8 

5.5 

5.0 

6.4 

7.1 

6.2 

4.9 

5.7 

1899 

5.0 

5.0 

5.2 

4.6 

5.5 

7.2 

5.9 

5.1 

5.8 

1900 

4.7 

6.2 

5.3 

5.1 

1901 

5.3 

4.9 

5.1 

4.7 

5.8 

6.6 

5.2 

5.1 

5.1 

1902 

5.6 

5.0 

4.5 

6.8 

5.1 

5.0 

5.1 

1903 

5.2 

5.4 

5.0 

4.5 

5.4 

6.7 

5.2 

5.1 

5.3 

1904 

5.8 

5.1 

4.5 

5.4 

6.6 

5.3 

5.1 

6.0 

92  INVESTMENT  EARNINGS. 

If  there  is  any  objection  to  the  rate  of  earning  power 
found  for  the  total  assets  and  for  real  estate,  and  as 
will  be  found  for  bonds  and  stocks,  because  items  of 
investment  fluctuation  are  included,  that  objection  will 
not  apply  to  the  rate  found  on  mortgage  loans.  A  mort- 
gage is  an  investment  by  secured  loan,  and  hence  in 
general  has  a  fixed  foreknown  return,  while  real  estate 
and  stocks  are  investments  by  purchase  and  actual 
ownership  of  the  property  bought.  This  differentiates 
mortgage  loans  from  real  estate  and  stocks.  On  the 
other  hand  mortgages  differ  from  bonds  in  that  there 
is  no  exchange  where  mortgages  are  bought  and  sold. 
As  a  result  the  item  of  investment  fluctuation  is  prac- 
tically absent  in  regard  to  mortgages,  and  the  rate  of 
earning  power  is  the  same  as  the  rate  of  interest  ob- 
tained by  the  use  of  the  same  formula. 

There  are  six  companies  whose  mortgage  investments 
extend  back  to  1860.  Four  of  these  companies  in  that 
year  made  more  than  eight  per  cent,  on  their  mortgage 
loans,  one  made  seven  per  cent.,  and  the  other  one  six 
and  one-half  per  cent.  This  was  a  rate  almost  two 
points  higher  than  was  realised  by  these  companies  on 
their  total  assets,  explaining  to  no  small  degree  the 
reason  for  the  large  proportion  of  the  assets  which  mort- 
gages then  formed.  High  as  the  rate  was  at  the  begin- 
ning of  the  decade  it  was  increased  until  an  annual  rate 
of  even  more  than  ten  per  cent,  was  earned  on  mort- 


INVESTMENT  EARNINGS.  93 

gage  loans.  As  the  rate  of  earning  power  on  mortgage 
loans  is  the  interest  rate,  this  ten  per  cent,  earning 
power  means  a  ten  per  cent,  interest  rate.  For  a  com- 
pany to  earn  this  rate  on  all  its  mortgage  loans  indi- 
cates that  a  portion  of  them  was  earning  a  higher  rate, 
which  indeed  was  true.  The  rate  in  the  middle  Western 
States,  Illinois  and  Iowa,  was  generally  ten  to  twelve 
per  cent,  during  this  decade  1  and  even  later.  In  the 
seventies  more  of  the  insurance  money  was  loaned  in 
the  West,  and  the  level  of  rates  earned  on  mortgages  was 
above  the  high  average  of  the  sixties.  In  the  decade, 
1860-69,  one-fourth  of  the  rates  earned  by  mortgages 
were  above  eight  per  cent.,  in  the  following  decade 
one-third  of  the  annual  rates  were  above  ten  per  cent. 
In  the  previous  decade,  one-sixth  of  the  annual  rates 
had  been  below  six  per  cent.,  from  1870-79  scarcely 
none  were  below  that  rate. 

Conditions  changed  rapidly  during  the  eighties.  In 
this  decade,  only  one-tenth  of  the  annual  rates  on 
mortgage  loans  were  above  eight  per  cent.,  a  striking 
contrast  to  the  one-third  above  ten  per  cent,  ten  years 
earlier.  The  rates  below  six  per  cent,  formed  one-third 
of  the  total  number  of  annual  rates.  However,  lower 
levels  were  to  be  reached  quickly.    From  1890  to  1899 

1  For  the  rate  of  interest  in  the  West  before  1860,  see  the  report 
of  the  committee  on  the  interest  rate  to  the  Second  Life  Insur- 
ance Convention,  1860,  found  in  the  United  States  Insurance 
Gazette  and  Magazine.    Volume  XI,  Page  214. 


94:  INVESTMENT  EARNINGS. 

only  six  annual  rates  reached  ten  per  cent.,  and  nearly 
two-thirds  were  now  below  six  per  cent.  In  the  last 
five  years,  no  company  has  earned  eight  per  cent,  on 
its  mortgage  loans,  and  only  one,  the  Union  Central, 
has  succeeded  in  earning  steadily  six  per  cent.  Besides 
this  one  company  six  per  cent,  on  mortgage  loans  has 
been  made  twice  since  1900  by  one  company,  and  once 
apiece  by  two  other  companies.  Beyond  these,  all  the 
annual  rates  on  mortgages  have  been  below  six  per  cent. 
Thus,  a  rate  of  six  per  cent,  is  now  realised  nearly 
so  frequently  as  was  a  rate  of  ten  per  cent,  thirty  years 
ago.  The  rate  in  fact  has  gone  considerably  below  six 
per  cent.  Since  1899  more  than  one-third  of  the  annual 
rates  earned  by  mortgage  loans  have  been  below  five  per 
cent.  Eleven  of  the  twenty-nine  companies  for  several 
years  have  made  on  mortgage  loans  little  more  than 
an  average  rate  of  four  and  one-half  per  cent. 

No  item  of  loss  has  been  considered  in  securing  the 
rates  on  mortgage  loans.  When  a  mortgage  loan  de- 
preciates in  value  because  of  the  inability  of  the  bor- 
rower to  pay  the  interest,  the  company  forecloses  the 
mortgage.  If  the  property  cannot  be  sold  for  more 
than  the  amount  of  the  mortgage,  the  company  takes  the 
real  estate  as  owner  at  a  value  equal  to  the  amount  of 
the  mortgage.  If  the  company  later  sells  the  property 
at  a  price  equal  to  the  amount  of  the  mortgage  plus  the 
accrued  interest,  there  is  no  loss  to  be  ascribed  to  any 


INVESTMENT  EARNINGS.  95 

asset.  If  the  property  is  sold  at  a  loss,  the  deficiency 
is  ascribed  to  real  estate,  when  it  really  should  be  taken 
account  of  in  the  mortgage  account.  The  state  reports 
have  never  separated  the  two  classes  of  real  estate,  so 
that  it  is  impossible  to  find  out  how  much  of  the  loss 
from  real  estate  should  be  considered  as  due  to  mortgage 
loans.  In  1902,  the  Insurance  Spectator  wrote  letters 
to  thirty-two  life  companies  in  regard  to  their  ex- 
perience with  foreclosed  property.  In  general  the  an- 
swers indicated  that  the  losses  have  been  small.  The 
Germania  through  its  President  replied  that  the  com- 
pany had  loaned  fifty-two  millions  on  mortgages.  Two 
and  three-quarter  millions  worth  of  real  estate  had  been 
acquired  through  foreclosure,  one-half  of  which  had  been 
sold  with  a  net  loss  of  only  eleven  thousand  dollars. 
The  President  of  the  Penn  Mutual  replied  that  there 
had  been  enough  profit  upon  foreclosed  properties  to 
more  than  offset  all  losses.  The  experience  of  the  Union 
Central  is  of  importance  because  of  its  large  propor- 
tion of  mortgages  to  total  assets,  and  because  of  the  high 
rate  it  is  yet  earning.  President  Pattison  answered 
that  the  Union  Central  had  during  thirty-five  years 
made  mortgage  loans  to  the  extent  of  fifty  million  dol- 
lars. The  total  loss  upon  realty  obtained  through  fore- 
closure had  been  less  than  one-tenth  of  one  per  cent. 
In  one  state  where  four  million  dollars  had  been  loaned 
on  real  estate  security  in  twenty  years  not  a  single 


96  INVESTMENT  EARNINGS. 

mortgage  had  been  foreclosed,  nor  had  the  due  and  un- 
paid interest  at  the  end  of  any  year  exceeded  two  hun- 
dred dollars.  Other  replies  were  more  or  less  favorable. 
The  conclusion  can  be  safely  reached  that  with  the  ex- 
ception of  a  few  companies  the  rate  which  has  been 
found  for  mortgages  in  the  preceding  tables  needs 
little  reduction  on  account  of  losses  through  foreclosure 
of  the  loans. 

We  now  come  to  the  last  class  of  assets  of  which 
it  is  possible  to  find  the  rate  of  earning  power.  The 
following  tables  give  this  rate  for  bonds  and  stocks. 


/ 


INVESTMENT  EARNINGS. 
EARNING  RATE  OF  BONDS  AND  STOCKS. 


97 


jj 

d 
a 

d 

1 

u 

3 

"-3  oS 

0  3 

03 

o 

4 

a 

E 

■ 

i 

o 

o 
o 
o 

d 

08 

08 

A 

fl 

1 

"S"o5 

3j,C  3 
8US 

d 

OS 

6% 
is  e. 

>* 

< 

n 

o 

m 

o 

W 

•"3 

s 

S 

X 

1860 

13.0 

-1.9 

1861 

0.5 

-3.2 

-10.0 

5.9 

1862 

3.2 

18.0 
18.1 

14.8 
12.3 

27.8 
17.2 
12.3 

24.2 
14.7 
20.3 

1863 

10.6 
11.3 

15.5 
21.5 

1864 

8.7 

11.7 

1865 

. . . 

3.7 

2.5 

10.3 

3.8 

4.2 

3.7 

2.4 

1866 

1867 

11.6 

12.3 

10.4 

9.8 

9.6 

8.7 

9.9 

11.3 

12.0 

9.5 

11.4 
11.1 

17.8 
4.7 

1868 

13.3 

10.9 

4.9 

8.7 

12.8 

6.3 

1869 

1870 

7.2 

1871 

8.2 

7.1 

7.4 

9.0 

11.3 

10.9 

10.3 

1872 

3.1 

6.4 

3.1 

5.8 

5.5 

6.3 

8.0 

1873 

7.4 

5.8 

5.9 

3.8 

2.0 

4.2 

2.2 

1874 

7.9 

9.5 

8.0 

11.6 

7.0 

7.6 

4.2 

1875 

9.5 

-3.4 

12.3 

2.5 

4.0 

. . . .. 

5.0 

10.4 

2.9 

9.7 

1876 

7.8 

2.4 

5.0 

2.4 

5.8 

4.6 

-0.8 

0.2 

4.4 

1877 

6.0 

2.4 

4.2 

3.5 

1.9 

5.5 

8.1 

5.5 

11.2 

1878 

7.9 

7.1 

5.7 

5.8 

5.5 

4.3 

-3.9 

10.8 

7.5 

1879 

7.3 

5.3 

6.2 

6.9 

5.1 

...... 

7.6 

8.8 

16.9 

9.2 

1880 

9.9 

5.3 

8.6 

13.8 

8.6 

10.6 

10.7 

15.3 

12.2 

1881 

7.0 

7.0 

6.3 

4.0 

6.3 

3.0 

6.9 

8.0 

3.1 

1882 

6.6 

9.4 

4.9 

1.3 

5.8 

3.8 

7.7 

5.4 

4.8 

1883 

5.4 

6.1 

5.1 

5.3 

5.8 

6.1 

7.3 

4.5 

3.0 

1884 

5.5 

1.8 

3.5 

3.7 

4.3 

5.2 

5.5 

-0.3 

0.5 

1885 

7.4 

4.6 

8.5 

15.3 

8.4 

9.2 

7.8 

11.3 

6.0 

1886 

6.0 

5.9 

7.2 

10.7 

6.6 

7.1 

7.0 

6.3 

3.8 

1887 

4.7 

3.1 

3.9 

7.9 

2.8 

4.4 

3.4 

3.6 

3.9 

4.7 

1888 

6.1 

4.3 

1889 

6.0 

3.9 

4.9 

7.3 

5.3 

4.6 

5.4 

4.4 

7.0 

5.2 

1890 

4.9 

3.0 

3.8 

3.7 

2.7 

6.7 

4.4 

2.9 

4.5 

1.9 

1891 

4.9 

4.5 

6.9 

9.3 

8.7 

5.3 

5.9 

6.5 

5.5 

6.6 

1892 

5.3 

3.5 

7.3 

7.2 

5.4 

8.1 

3.7 

7.1 

5.4 

5.3 

1893 

3.9 

3.9 

2.1 

2.2 

2.2 

3.6 

5.3 

2.3 

2.1 

2.6 

1894 

5.1 

3.7 

7.1 

2.9 

7.5 

6.2 

4.7 

7.6 

7.6 

6.0 

1895 

4.7 

3.9 

5.9 

4.1 

5.1 

3.0 

4.7 

6.6 

4.5 

4.4 

1896 

4.5 

4.7 

4.5 

3.6 

2.8 

3.0 

3.0 

2.8 

3.0 

4.1 

1897 

6.6 

6.5 

6.5 

5.8 

6.9 

4.8 

6.3 

8.8 

7.9 

7.3 

1898 

7.0 

6.6 

5.7 

7.6 

5.3 

5.8 

6.7 

6.7 

7.5 

7.0 

1899 

5.6 

5.2 

3.8 

4.4 

3.4 

4.2 

4.8 

5.4 

4.4 

6.6 

1900 

5.5 

5.2 

6.4 

.2.1 

4.1 

6.4 

4.8 

8.3 

5.4 

5.2 

1901 

6.4 

6.6 

4.6 

5.1 

6.3 

6.4 

4.8 

5.5 

3.7 

7.1 

1902 

5.2 

5.3 

2.7 

4.4 

8.2 

5.1 

3.2 

4.3 

2.9 

2.9 

1903 

3.0 

2.3 

0.7 

2.2 

3.2 

0.2 

2.9 

1.3 

1.7 

0.2 

1904 

5.8 

5.2 

6.2 

6.5 

4.0 

7.8 

6.1 

3.4 

5.8 

8.8 

98  INVESTMENT  EARNINGS. 

EARNING  RATE  OF  BONDS  AND  STOCKS. 


j 

i 
5  3 

"3 

3 

g 

i 

a> 

.2m 

3 

1 
a 
o 

1 

•3 

a 
a 
"5b 

0)^ 

M 
E 

o 

J* 

a 
1 

d 
O 

6 
1 

a 

a 

'3 
8 

h 

9 

i 

M 

fc 

fc 

fc 

fc 

£ 

£ 

£ 

1860 

7.8 
5.2 

6.1 

-8.1 

17.1 

8.4 
12.6 

3.3 

5.8 
5.8 
8.7 
14.2 
2.1 
1.1 

1.7 

-2.7 

17.6 

17.0 

8.7 

3.0 

1861 

1862 

1863 

12.3 

15.3 

-4.2 

iiT 

6.5 

1864 

19.4 

1965 

7.8 

1866 

1867 

13.4 

8.1 
9.1 
9.0 
6.9 

8.1 

10.6 

10.9 

7.8 

4.0 

9.2 

"'6.5 
13.6 

12.4 
7.2 
9.3 

1868 

1869 

4.8 
6.0 
4.4 

1870' 

0.0 
12.6 

1871 

6.9 

1872 

6.9 

6.6 

5.3 

5.9 

7.4 

9.3 

5.5 

1873 

6.9 

6.2 

9.3 

5.4 

7.1 

6.5 

6.5 

1874 

8.9 

8.1 



8.0 

7.5 

16.5 

7.2 

1875 

11.6 

7.9 

7.1 

9.6 

10.1 

-1.1 

13.9 

1.4 

1876 

-5.7 

11.3 

5.7 

5.8 

5.5 

5.7 

7.4 

0.5 

1877 

3.8 

4.5 

1.7 

6.4 

3.5 

-0.7 

o'.b 

2.2 

4.0 

1878 

7.3 

6.5 

5.9 

9.1 

6.5 

4.4 

0.0 

6.9 

6.5 

1879 

8.3 

4.4 

7.7 

6.4 

6.8 

7.4 

7.1 

0.0 

10.1 

11.4 

1880 

7.9 

15.2 

9.0 

7.4 

11.9 

12.4 

5.6 

0.0 

9.1 

10.0 

1881 

6.2 

8.6 

5.1 

6.1 

6.3 

7.0 

4.8 

0.0 

7.3 

6.3 

1882 

10.8 

5.2 

2.2 

4.6 

4.4 

6.0 

3.8 

0.0 

6.5 

6.2 

1883 

1.1 

7.1 

2.6 

56 

4.8 

6.2 

5.2 

0.0 

5.9 

5.6 

1884 

0.0 

4.3 

2.6 

5.1 

3.7 

1.6 

1.5 

0.0 

4.2 

3.9 

1885 

11.2 

4.0 

5.1 

8.2 

11.7 

1.9 

16.7 

8.0 

6.4 

1886 

6.2 

5.0 

1.9 

6.3 

7.1 

4.9 

5.6 

7.6 

5.5 

1887 

3.9 

3.8 

5.5 

1.4 

4.7 

4.4 

6.1 

5.7 

5.0 

1888 

7.8 

4.4 

12.9 

5.1 

6.4 

2.9 

8.1 

5.4 

2.7 

1889 

50.0 

1.5 

4.0 

5.3 

5.3 

5.8 

8.3 

6.7 

5.7 

6.2 

1890 

5.9 

3.1 

4.1 

2.2 

3.2 

5.2 

6.4 

3.2 

3.8 

1891 

100.0 

5.2 

5.0 

5.4 

5.2 

4.2 

4.4 

7.3 

6.7 

4.7 

1892 

10.0 

8.0 

4.7 

5.9 

4.9 

6.0 

5.4 

6.0 

5.9 

5.7 

1893 

5.0 

2.9 

3.9 

4.6 

1.1 

4.2 

5.0 

5.5 

11.0 

4.5 

1894 

5.0 

3.3 

4.4 

5.2 

2.8 

5.4 

6.1 

4.0 

2.7 

5.7 

1895 

5.0 

3.4 

5.0 

5.1 

5.1 

5.4 

3.4 

7.7 

11.4 

4.8 

1896 

-10.0 

5.0 

3.9 

4.5 

4.2 

5.4 

4.0 

7.5 

1.2 

5.5 

1897 

7.7 

6.3 

6.6 

5.9 

5.0 

5.0 

9.4 

7.4 

5.0 

1898 

1.0 

8.8 

5.4 

5.3 

6.4 

6.5 

5.8 

8.0 

7.3 

6.1 

1899 

3.6 

7.4 

4.1 

4.3 

5.9 

5.7 

3.0 

9.5 

4.9 

5.4 

1900 

8.3 

5.7 

6.5 

2.8 

4.9 

5.5 

4.9 

8.4 

5.9 

6.5 

1901 

5.5 

6.5 

3.8 

2.8 

5.4 

4.5 

3.2 

6.4 

5.6 

5.0 

1002 

1.8 

4.7 

2.6 

3.6 

3.7 

4.2 

2.3 

5.6 

4.8 

2.4 

1903 

0.0 

0.5 

2.7 

3.0 

1.7 

4.0 

4.0 

3.1 

2.8 

4.3 

1904 

7.1 

8.5 

5.6 

3.3 

5.0 

4.2 

6.7 

5.0 

6.8 

5.6 

INVESTMENT  EARNINGS. 
EARNING  RATE  OF  BONDS  AND  STOCKS. 


99 


«'2« 

ill 

§3 

E 

Hi 

3* 

§.s 

T3  > 

e 

]3 
a 

0> 

•0 

3 
E 

6 

Travelers'. 

"5 

Q  oi 
.20 

a 

"3 
0 

United 

States. 

d 

0 

"So 
1 

6.9 
10.3 
11.0 
19.8 

0.7 

6.6 
3.9 

'12.6 

7.7 
13.6 
9.7 
3.6 
8.4 
5.3 
7.0 
9.7 
4.9 
10.5 
4.5 
4.6 
7.8 

5.2 

10.8 
6.7 
-4.2 
1.5 
1.9 
5.8 
15.2 
3.0 
2.5 
7.1 
5.5 

11.3 

13.8 
2.8 
6.1 
4.2 
6.1 
7.2 
31.6 
-3.7 
4.7 
5.5 
7.0 

5.8 
8.8 
6.8 
7.1 
6.9 

14.1 

' 

8.5 
13.6 
6.6 
4.9 
7.9 
11.0 

—  10.2 

2.5 

-20.8 

0.0 

12.5 

-1.7 
0.9 
3.9 
2.9 

0.0 

5.5 

3.1 

6.0 

8.2 

7.7 

11.7 

4.9 

4.8 

6.0 



6.8 

10.0 

7.3 

6.2 

7.0 

3.6 

5.9 

8.9 

5.0 

0.0 

7.0 

2.3 

0.0 

-3.3 

6.7 

—2.0 

1.4 

6.2 

2.0 

0.0 

0.0 

4.9 

3.8 

5.3 

6.4 

5.1 

3.9 

10.4 

11.1 

7.6 

10.4 

6.9 

6.3 

3.1 

4.4 

7.1 

-14.3 

6.4 

6.2 

11.3 

3.2 

4.8 

0.6 

4.9 

2.5 

0.0 

2.5 

1.4 

5.2 

5.3 

5.2 

4.4 

7.1 

2.1 

4.5 

5.6 

0.0 

4.5 

6.1 

2.7 

0.2 

8.0 

5.3 

2.0 

5.8 

4.9 

5.4 

7.1 

6.5 

6.8 

0.0 

4.7 

6.3 

4.3 

4.2 

4.0 

4.3 

6.1 

4.9 

1.7 

-1.1 

5.5 

3.7 

8.0 

5.1 

2.2 

1.2 

—2.2 

5.8 

11.9 

5.9 

5.7 

5.2 

23.5 

9.5 

7.2 

2.7 

4.4 

-0.5 

4.6 

5.4 

4.5 

0.0 

5.5 

3.4 

—0.3 

3.9 

5.7 

5.4 

4.7 

4.8 

0.0 

5.2 

3.9 

0.6 

6.6 

9.7 

6.6 

4.7 

8.1 

0.5 

6.0 

9.5 

6.4 

9.3 

12.2 

6.0 

6.8 

8.0 

0.0 

7.1 

10.6 

1.3 

5.2 

5.6 

3.8 

5.9 

5.6 

6.0 

6.5 

6.0 

3.8 

6.1 

6.8 

7.3 

5.9 

6.9 

2.8 

5.8 

5.3 

4.5 

4.6 

4.8 

5.6 

9.0 

6.7 

3.4 

6.1 

4.5 

1.8 

3.7 

19.8 

7.7 

4.0 

2.6 

-3.4 

5.3 

4.5 

0.5 

-1.8 

3.2 

1.7 

2.8 

1.8 

0.0 

1.8 

0.4 

0.6 

6.7 

0.0 

6.5 

5.0 

5.6 

9.1 

5.5 

9.9 

3.7 

100  INVESTMENT  EARNINGS. 

If  the  amount  of  the  investment  fluctuation  for  bonds 
and  stocks  were  given,  it  would  show  how  sensitive 
the  value  of  these  securities  is  to  the  business  .condi- 
tions in  the  country.  For  a  period  a  company  makes 
a  gain  from  increase  in  values  and  from  the  sale  of 
securities,  "then  for  a  year  or  more  there  are  losses.  The 
gains  from  the  fluctuation  have  exceeded  the  losses,  for 
the  decreasing  rate  of*  interest  has  caused  the  long-time 
securities  owned  by  the  companies  to  appreciate.  The 
result  is  that  the  rate  of  earning  power  as  found  in  the 
tables  on  the  average  is  higher  when  the  investment 
fluctuation  is  taken  account  of  than  it  would  be  if  the 
fluctuation  were  neglected.  Likewise  the  rate  varies 
widely  from  year  to  year  when  the  investment  fluctua- 
tion is  included. 

From  1860-69  the  companies  whose  record  extends 
back  that  far  had  annual  earning  rates  on  bonds  and 
stocks  of  over  ten  per  cent,  for  nearly  half  the  years. 
A  half  of  the  remaining  annual  rates  were  above  six 
per  cent.,  the  remaining  rates  being  under  six  per  cent. 
The  earning  power  of  bonds  did  not  increase  in  the 
seventies,  as  it  did  for  mortgages.  In  this  decade  in- 
stead of  half  the  annual  earning  rates  being  above  ten 
per  cent.,  as  they  were  in  the  previous  decade,  few  over 
one-eighth  of  them  were  on  that  high  level.  Half  of 
the  rates  were  between  six  and  ten  per  cent.,  leaving 
thirty-five  per  cent,  below  six  per  cemt.     The  eighties 


INVESTMENT  EARNINGS.  101 

show  a  more  decided  drop  in  the  earning  rate  of  bonds 
and  stocks.  One-tenth  of  the  rates  were  above  ten  per 
cent.,  one-third  were  above  six  and  under  ten  per  cent., 
and  more  than  one-half  of  the  annual  rates  were  under 
six  per  cent.  From  1890-99  the  rates  above  ten  per 
cent,  were  few  and  were  the  result  of  special  conditions. 
The  earning  rate  of  bonds  and  stocks  was  also  falling 
below  six  per  cent.,  for  now  two-thirds  of  the  annual 
rates  were  below  six  per  cent.  The  period  since  1899 
shows  that  the  tendency  to  lower  rates  has  been  main- 
tained by  this  class  of  assets  that  we  are  considering. 
Without  the  great  increase  in  market  values  which  took 
place  in  1904,  few  companies  would  have  earned  a  rate 
of  six  per  cent,  for  any  year  on  the  bonds  and  stocks 
which  they  possessed. 

Thus  bonds  and  stocks  have  suffered  a  severe  decline 
in  earning  power  since  1860.  In  spite  of  the  surplus 
of  increase  in  market  value  over  decreases  in  market 
value  which  is  true  of  the  period  as  a  whole  the  decline 
in  earning  power  has  been  marked. 

There  has  been  much  discussion  as  to  the  advantage 
of  mortgage  loans  as  an  investment  for  life  insurance 
companies  compared  with  bonds  and  stocks.  From  the 
income  producing  standpoint  mortgages  so  far  have  had 
the  advantage.  If  the  rates  realised  by  the  individual 
companies  on  these  two  classes  of  assets  be  compared 
year  by  year,  it  will  be  found  that  during  the  decade    » 


102  INVESTMENT  EARNINGS. 

1860-69  bonds  and  stocks  earned  a  higher  annual  rate 
than  did  mortgage  loans  twice  to  the  latter's  once.  In 
the  following  decade  the  situation  changed.  Mortgages 
earned  a  higher  rate  two  times  to  the  bonds  and  stocks' 
higher  rate  once.  This  superior  earning  rate  kept  up 
in  the  same  proportion  with  remarkable  steadiness  dur- 
ing three  decades,  1870  to  1899,  mortgages  making  the 
higher  rate  two-thirds  of  the  time.  In  the  last  five 
years,  bonds  and  stocks  have  gained,  mortgage  loans 
have  had  a  higher  rate  of  earning  power  only  four  times 
out  of  seven  instead  of  two  out  of  three  times.  Whether 
this  shows  that  bonds  and  stocks  are  gaining  relatively 
to  mortgage  loans  is  hard  to  decide.  In  this  short  per- 
iod, there  have  been  two  years  of  remarkable  increases 
in  market 'values,  one  in  1900  and  again  in  1904  caus- 
ing a  higher  rate  of  earning  power  for  bonds  and  stocks 
during  those  two  years.  It  does  appear  that  mort- 
gage loans  are  still  yielding  higher  rates  of  income 
than  are  bonds  and  stocks  of  the  character  possessed 
by  the  insurance  companies,  though  they  have  lost  much 
of  the  superiority  which  they  possessed  during  the 
seventies  and  the  two  following  decades. 

It  is  thus  seen  that  there  has  been  a  serious  decline 
in  the  Tate  of  earning  power  of  the  assets  belonging  to 
the  life  insurance  companies  in  the  United  States.  Of 
course,  this  decline  in  the  rate  on  the  insurance  assets 
is  simply  a  reflex  of  the  general  fall  in  the  rate  of  in- 


INVESTMENT  EARNINGS.  103 

terest  since  the  Civil  War.  Before  discussing  the  causes 
of  this  declining  rate  or  of  the  increasing  rate  before  the 
War  it  will  help  us  to  see  how  far  the  phenomena  in 
the  United  States  are  connected  with  those  of  other 
countries.  We  would  expect  Canada  to  have  a  similar 
experience  to  that  of  ours,  and  so  it  is  so  far  as  we 
have  been  able  to  gather  the  statistics.  The  rates  earned 
by  the  assets  of  Canadian  companies  since  1880  are  as 
follows : 


Year.    p.  c. 

Year.  p.  c. 

Year.    p.  c. 

1880— 6. 81 

1886—6.3 

1892—5.5 

1881—6.8 

1887—6.6 

1893—5.4 

1882-6.2 

1888—5.8 

1894—5.4 

1883—6.6 

1889—5.7 

1895—5.2 

1884—6.1 

1890—5.6 

1896—4.7 

1885—6.2 

1891—5.6 

1897—4.7 

The  Canadian  companies  have  experienced  quite  the 
same  decline  in  the  rate  of  earning  power  as  have  the 
companies  of  the  United  Sates.  The  rate  earned  by  the 
total  assets  of  Australian  companies  exhibits  a  similar 
decline  in  the  same  period.  At  the  end  of  five-year 
periods,  the  rate  has  been.1 


Year.   p.  c. 

Year.   p.  c. 

Year.    p.  c. 

1880—6.5 

1890—6.0 

1900—4.6 

1885—6.2 

1895—5.5 

1902—4.6 

The  Government  insurance  department  of  New  Zea- 
land made  an  extremely  low  rate  of  interest  on  the  as- 

1  In  these  rates  the  profits  from  the  sale  of  securities  have  been 
included.  The  rates  have  been  taken  from  a  paper  by  Frank 
Sanderson,  Transactions  of  the  Actuarial  Society  of  Edinburgh, 
Volume  III,  Page  178. 


104  INVESTMENT  EARNINGS. 

sets  in  1870  and  was  able  to  raise  this  rate  till  1891, 
since  which  time  there  has  been  a  decline  from  five 
and  four-tenths  per  cent,  to  four  and  four-tenths  per 
cent,  in  1902. 

So  far  we  have  been  studying  the  rates  earned  by 
companies  in  comparatively  new  countries.  Turning  to 
the  rates  realised  by  English  companies,  they  are  of 
great  interest  because  England  is  a  country  which  had 
realised  a  high  stage  of  industrial  development  some 
three-quarters  of  a  century  ago.  Statistics  of  English 
companies  are  available  for  longer  periods  than  are 
those  of  other  countries.  In  1837  forty-six  English 
companies  made  an  average  rate  of  three  and  six-tenths 
per  cent.  The  Scottish  offices  made  four  and  four- 
tenths  per  cent,  for  the  same  year.1  After  1837  the 
statistics  of  the  total  assets  of  a  number  of  companies 
are  not  available  for  some  years,  but  taking  the  rates 
made  by  a  representative  Scottish  office,  the  Scottish 
National,  somewhat  of  a  gain  in  rates  is  noticeable. 
These  rates  were 

Five  years  1845-1580—4.4  p.  c. 
"     "    1860-1885—4.7  p.  c. 

Erom  1865  we  have  many  statistics  for  the  English 
companies'  assets,  the  rates  made  are  as  follows :  2 

1  David  Deuchar,  Journal  of  the  Institute  of  Actuaries,  Volume 
28,  Page  450. 

2  The  rates  for  1866-1869  inclusive  are  taken  from  a  paper  by 
Mr.  A.  Hewat,  Actuarial  Society  of  Edinburgh,  January,  1880. 


INVESTMENT  EARNINGS. 


105 


Tear.  p.  c. 
1866-4.52 
1867—4.49 
1868—4.46 
1869—4.45 
1870—4.27 
1871—4.33 
1872—4.30 
1873—4.45 
1874—4.52 
1875—4.64 
1876—4.43 
1877—4.46 
1878^-4.38 


Year.  p.c. 

1879—4.53 

1880—4.37 

1881—4.29 

1882—4.41 

1883—4.23 

1884—4.25 

1885—4.25 

1886—4.17 

1887—4.20 

1888—4.11 

1889—4.02 

1890—4.00 

1891—4.16 


Year.  p.  c. 

1892—4.14 

1893—4.09 

1894—3.92 

1895—3.96 

1896—3.85 

1897—3.83 

1898—3.81 

1899-3.77 

1900—3.78 

1901—3.71 

1902—3.67 


The  rate  realised  in  1902  by  the  English  companies 
was  still  above  that  earned  in  1837,  but  it  was  lower  by 
almost  one  per  cent,  than  the  rate  of  1866.  Between 
1837  and  1866  the  rate  had  increased,  and  the  level  of 
1866  was  maintained  for  twenty  years.  Since  1885  the 
rate  of  income  has  been  declining  continuously. 

The  Gotha  Mutual  Life  Insurance  Company,  one  of 
the  largest  in  Germany  in  the  decade  1829-39  made  an 
average  rate  of  3.94  per  cent,  on  its  mean  assets.  In 
the  following  decade  it  made  3.71  per  cent.  During 
the  years  1852-6,  the  rate  was  3.90,  showing  an  upward 
trend  again.    During  1874  the  company  made  4.83  per 

The  basis  used  is  mean  assets,  no  other  refinements  are  used  in  the 
method.  From  1870  to  1896  inclusive  the  rates  are  taken  from  a 
table  compiled  by  Mr.  Joseph  Burns,  Journal  of  the  Institute  of 
Actuaries,  Volume  34,  Page  495.  The  rates  are  for  the  assets  of 
twelve  leading  companies,  computed  on  mean  assets  and  profit 
and  loss  on  investments  have  been  included.  The  rates  since 
1896  are  for  the  assets  of  all  the  companies  and  are  computed  by 
the  writer  on  mean  assets,  only  interest  earned  being  considered. 


106  INVESTMENT  EARNINGS. 

cent,  on  its  assets  showing  a  great  increase  over  the 
previous  years.  However,  this  was  the  highest  rate 
reached  and  in  1885  the  annual  rate  had  fallen  to  4.22 
per  cent.  Since  which  time  the  rate  has  further  de- 
clined to  3.87  per  cent,  in  1902. 

Thus  it  is  seen  that  there  have  been  certain  world- 
wide movements  in  the  rate  of  interest.  For  thirty 
years  approaching  1870  the  tendency  of  the  rates  was 
upward.  In  the  preceding  tables  the  rates  were  not 
found  for  all  the  countries  before  1870,  but  the  ex- 
amination of  the  interest  rate  realised  by  individual 
companies  will  show  that  in  general  in  old  and  in 
new  countries,  there  was  this  gradual  upward  tendency. 
Since  that  time  there  has  been  a  world-wide  decline  in 
the  rate.  Therefore  the  decline  in  the  rate  earned  by 
American  companies  is  not  to  be  studied  as  an  isolated 
fact  but  in  the  light  of  the  previous  opposite  tendency 
and  the  universal  movement. 

It  is  not  the  purpose  here  to  enter  into  an  extended 
discussion  of  the  conditions  determining  the  rate  of 
interest  such  as  would  be  necessary  if  we  were  to  under- 
stand the  fluctuations  which  have  taken  place  in  that 
rate.  The  formulation  of  the  agio  theory  of  interest, 
namely,  that  interest  is  the  premium  which  is  paid  for 
the  use  of  present  goods  in  preference  over  future  goods 
has  aided  much  in  explaining  the  changes  in  the  rate 
of  that  premium.     Accepting  the   agio  theory  of  in- 


INVESTMENT  EARNINGS.  107 

terest,  some  of  the  leading  causes  of  the  fluctuation 
which  we  have  already  noticed  will  be  indicated. 

In  the  first  place,  the  rate  of  interest  is  high  when 
men  look  hopefully  to  the  future  and  low  when  the 
future  does  not  hold  out  such  bright  prospects.  From 
1846  to  1870  there  is  reason  to  believe  that,  except  for 
the  slight  shock  of  the  crisis  in  1857,  men  looked  with 
strong  faith  to  what  the  future  held  forth.  It  was 
a  period  in  which  the  development  of  the  North  and 
West  went  on  apace.  All  sorts  of  investments  were 
made  which  did  not  pay  at  first,  but  which  it  was 
trusted  that  the  future  would  bring  sufficient  develop- 
ment to  make  profitable.  During  the  seventies,  there 
was  one  of  the  most  severe  and  prolonged  depressions 
which  the  country  has  ever  experienced.  How  far  this 
caused  men  to  be  more  cautious  of  the  future  is  not 
known.  Such  effects  cannot  be  measured,  but  there  was 
scarcely  a  business  which  did  not  suffer  intensely  dur- 
ing that  period,  and  certain  it  is  that  since  then  there 
has  been  a  more  sane  development  in  most  businesses. 
This  is  shown  in  our  own  field  by  the  fact  that  there 
are  not  as  many  life  insurance  companies  in  the  United 
States  even  now  thirty-five  years  later  as  there  were  in 
1870-1.  However,  it  is  merely  a  suggestion  that  the 
rise  and  fall  in  the  rate  of  interest  has  been  to  some  de- 
gree the  result  of  this  psychical  change. 

The  Civil  War  destroyed  a  tremendous  amount  of 


108  INVESTMENT  EARNINGS. 

capital.  Whatever  lessens  the  amount  of  present  capital 
goods  makes  present  skimping  necessary  to  restore  the 
waste  and  get  back  the  normal  income  after  that  waste  is 
repaired.  Undoubtedly  the  war  was  one  of  the  influ- 
ences which  made  the  rate  of  interest  high  in  the  United 
States  during  the  sixties.  Not  only  was  the  rate  in 
this  country  affected,  but  as  the  burden  of  that  war 
was  to  an  extent  borne  temporarily  by  other  countries 
through  the  purchase  of  American  securities,  it  meant 
a  higher  rate  of  interest  the  world  over.  Since  the 
Civil  War  until  recently  there  have  not  been  any  very 
destructive  wars.  Capital  has  increased  rapidly,  and 
as  a  result  the  premium  on  the  relatively  abundant 
present  goods  has  become  smaller. 

Again  it  has  been  shown  conclusively  that  there  is 
a  close  connection  between  prices  and  the  rate  of  in- 
terest.1 With  rising  prices  we  find  a  high  interest  rate, 
with  falling  prices  a  low  rate  of  interest.  It  is  well 
known  that  the  gold  discoveries  of  1848-50  in  Cali- 
fornia and  Australia  caused  prices  to  rise  in  all  coun- 
tries. This  general  appreciation  of  commodities  in 
values  may  explain  why  insurance  companies  the  world 
over  were  enabled  to  increase  the  earning  rate  of  their 
assets  after  1850  for  twenty  or  twenty-five  years. 
Following  the  early  seventies,  there  was  a  decline  in 

1  For  a  discussion  of  the  important  connection  between  price 
and  the  interest  rate  see  Prof.  Fisher's  "  Appreciation  and  Inter- 
est."   Publication  of  the  American  Economic  Association,  1896. 


INVESTMENT  EARNINGS.  109 

prices  which  lasted  until  the  discoveries  of  gold  in 
Alaska  and  South  Africa.  Along  with  this  decline  in 
the  price  level  there  came  as  a  result  a  decline  in  the 
interest  rate. 

There  have  been  other  elements  entering  into  the 
situation  in  the  United  States  to  cause  a  decline  in  the 
rate  of  earnings.  Since  1865,  the  United  States  has 
become  far  more  homogeneous.  It  is  no  longer  possible 
for  the  general  rate  of  interest  in  one  portion  of  the 
country  to  be  three  to  five  per  cent,  higher  than  it  is  in 
other  portions  of  the  country  at  the  same  time.  Europe 
has  come  to  know  American  securities  better,  and  with 
this  knowledge  have  come  greater  investments  of  Euro- 
pean capital  in  the  United  States.  This  has  tended  to 
keep  the  rate  up  in  Europe,  but  the  rate  has  fallen  more 
rapidly  in  the  United  States  because  of  the  influx  of 
foreign  capital. 

The  all-important  question  remains,  has  the  decline 
in  the  rate  of  interest  been  arrested?  There  are  some 
indications  that  the  low  level  has  been  reached.  Large 
amounts  of  gold  are  being  added  to  the  existing  stock 
each  year,  and  prices  have  been  rising  steadily  for  some 
years.  It  is  not  contended  that  a  change  in  prices  will 
change  the  interest  rate  under  all  conditions.  But  if 
prices  continue  to  rise,  and  it  looks  as  if  they  will,  the 
decline  in  the  interest  rate  ought  to  be  succeeded  by 
a  rise.     Much  depends  on  how  long  prices  continue 


HO  INVESTMENT  EARNINGS. 

to  rise  and  on  how  clearly  investors  realize  the  more 
or  less  permanent  change  in  the  trend  of  the  movement. 

The  price  level  is  a  condition  over  which  the  officials 
of  insurance  companies  have  no  control.  There  are  con- 
ditions, however,  of  which  they  should  take  advantage. 
The  decline  in  the  rate  of  earnings  since  three  decades 
ago  has  been  lessened  by  keeping  a  larger  proportion 
of  the  assets  invested.  Other  methods  to  secure  a  good 
rate  have  been  adopted,  and  some  of  the  companies  have 
succeeded  in  maintaining  remarkably  high  rates  of  in- 
terest. Of  other  companies  it  is  doubtful  whether  all 
that  could  be  done  to  secure  better  rates  has  been  ac- 
complished. Some  managements  have  directed  their  at- 
tention mainly  to  getting  new  business  as  if  the  only 
function  of  a  life  insurance  company  were  to  get  in- 
surance in  force.  Granting  that  such  is  its  chief  func- 
tion, it  should  be  the  object,  at  least  of  a  mutual  com- 
pany, to  make  its  insurance  cost  the  members  the  least 
possible.  Yet  tremendous  energies  and  large  amounts 
of  money  have  been  spent  in  securing  new  business  and 
comparatively  little  attention  has  been  given  to  securing 
the  highest  rates  of  earning  on  the  assets. 

It  is  not  the  intention  to  point  out  any  securities 
which  a  life  company  should  select,  nor  indeed  any  class 
of  securities.  It  is  a  fact,  as  shown  by  the  statistics  of 
this  chapter,  that  some  companies  are  earning,  in  some 
cases,  more  than  one  per  cent,  more  than  are  other  com- 


INVESTMENT  EARNINGS.  HI 

panies.  When  we  examined  the  classes  of  assets  in  the 
previous  chapter,  it  was  seen  that  some  companies  had 
assets  largely  of  one  character,  and  other  companies  had 
assets  of  a  different  class.  Those  which  have  large 
mortgage  holdings  are  on  the  whole  making  the  best 
rate  of  interest.  It  is  not  urged  that  all  a  company's 
funds,  or  even  a  majority  portion  of  them  should  be 
invested  in  mortgage  loans,  for  there  are  as  we  have 
seen  certain  drawbacks  to  such  loans.  What  is  con- 
tended for  is  that  the  managers  of  a  company  should 
not  be  satisfied  with  the  easy  method  of  investing  their 
funds  of  buying  the  securities  through  a  brokerage 
firm.  There  is  no  doubt  but  that  the  investment  of  the 
assets  in  certain  bonds  and  stocks  give  the  officers  of 
the  company  doing  so  a  power  in  the  financial  world 
which  they  would  not  possess  if  the  funds  were  invested 
in  other  ways,  but  it  is  hardly  necessary  to  say  that 
from  the  policy-holders'  standpoint  such  power  is  of 
slight  importance.  What  they  desire  is  high  earning 
power. 

If  the  earning  rate  of  the  assets  is  to  be  kept  at  the 
height  it  should  be,  the  investment  department  must  be 
conducted  with  the  same  energy  that  is  evident  in  other 
departments  of  the  company.  Good  investments  must 
be  sought  with  the  same  zeal  that  policy-holders  are 
sought  after.  Investments  must  be  found  which  com- 
bine a  high  element  of  safety  with  a  high  element  of 
earning  power. 


CHAPTEK  IV. 

THE  COST   OF  INVESTMENTS. 

In  the  preceding  chapter  the  rate  of  earning  power 
of  various  classes  of  assets  was  found.  It  was  said 
then  that  in  finding  the  rates  no  allowance  had  been 
made  for  any  expenses  connected  with  the  investments, 
nor  for  caring  for  them  and  collecting  the  interest  after 
they  were  made.  But  it  is  obvious  that  these  expenses 
should  be  considered  in  a  study  of  the  earning  power 
of  the  assets.  We  saw  that  some  companies  were  mak- 
ing a  higher  rate  of  earnings  than  were  other  com- 
panies, and  that  certain  classes  of  assets  had  on  the 
whole  paid  better  than  had  other  assets.  The  question 
arises  as  to  whether  these  higher  rates  may  not  be  af- 
fected by  a  higher  cost  of  investment,  thus  neutralising 
the  good  showing  which  certain  companies  and  certain 
classes  of  assets  have  made.  It  is  the  purpose  of  the 
present  chapter  to  study  the  investment  costs. 

There  are  serious  difficulties  in  such  a  study.  In 
the  first  place,  it  is  impossible  for  a  company  even  if 
it  goes  seriously  to  the  task  to  find  out  what  are  its 
investment  expenses.  What  expenditures  should  be  in- 
cluded under  investment  costs  ?    Some  very  readily  fall 

112 


THE  COST  OF  INVESTMENTS.  113 

into  the  category.  Such  are  taxes  of  real  estate  owned 
by  the  company,  repairs  and  other  expenses  connected 
with  the  ownership  of  real  estate  and  taxes  on  other 
assets  belonging  to  the  company.  If  the  company  has 
an  investment  department  and  officials  and  employees 
in  that  department  whose  time  is  devoted  exclusively  or 
practically  so  to  the  investment,  to  the  collection  of  in- 
terest and  kindred  duties  regarding  the  assets,  the  ex- 
penses of  this  department  may  als6  be  readily  classi- 
fied as  investment  expenses.  Again,  companies  have 
investment  agencies  in  various  localities.  These  agen- 
cies have  nothing  to  do  with  getting  insurance  in  force, 
but  are  concerned  only  with  the  investment  side  of  the 
business.  The  cost  of  maintaining  these  agencies  should 
be  included  under  investment  expenses.  Such  expendi- 
tures are  easily  classified,  but  what  are  we  to  do  about 
the  division  of  the  salaries  of  the  executive  officers 
whose  duties  involve  jurisdiction  over  all  departments 
of  the  company  ? 

The  time  was  when  the  officials  of  a  life  insurance 
company  were  chosen  and  paid  large  salaries  because 
of  their  ability  to  get  insurance  in  force.  Such  men  are 
ever  needed  by  a  small  company.  Under  this  condition 
the  larger  part  of  their  salaries  can  be  included  under 
the  cost  of  getting  business.  However,  when  a  company 
becomes  the  possessor  of  as  large  assets  as  some  control 
today,  the  responsibility  arising  from  the  safe  invest- 


8 


O-THE 

f    UNIVERSITY  \ 

~  OF  J 


114  THE  COST  OF  INVESTMENTS. 

ment  of  these  assets  at  a  satisfactory  rate  of  interest  is 
so  great  that  men  with  financial  genius  are  required  for 
the  highest  offices  of  a  company.  Are  the  salaries  of 
such  positions  to  be  considered  as  investment  costs? 
The  objection  to  so  doing  lies  in  the  fact  that  no  com- 
pany has  yet  reached  the  point  of  possessing  assets  so 
large  that  it  has  given  up  the  competition  for  new  busi- 
ness. Rather  the  opposite  tendency  has  prevailed. 
With  large  assets,  the  pursuit  of  new  business  has  been 
pushed  with  vigor,  and  the  managing  of  the  agency 
force  has  continued  to  make  large  demands  upon  the 
executive  officials  of  the  companies.  Therefore  it  is 
impossible  to  say  how  much  of  certain  large  home  office 
expenses  should  be  considered  as  investment  costs. 

Despite  the  impossibility  of  apportioning  the  expenses 
of  a  life  insurance  company  to  investments  on  the 
one  hand  and  to  insurance  on  the  other,  we  find  that 
such  an  attempt  has  been  made.  In  1897,  the  Commis- 
sioner of  Insurance  of  Connecticut  and  those  of  several 
other  states  compelled  the  companies  to  make  a  gain 
and  loss  exhibit.  This  exhibit  showed  among  other 
facts  the  investment  expenses  of  each  company  during 
the  preceding  year.  Since  then,  this  exhibit  has  been 
included  in  the  annual  reports  of  some  state,  so  that  for 
the  last  nine  years  we  do  have  certain  statistics  regard- 
ing the  expenses  of  the  investments.  In  looking  over 
these  statistics  one  is  immediately   struck  with  their 


THE  COST  OF  INVESTMENTS.  115 

incompleteness,  and  in  many  instances  evident  worth- 
lessness  as  showing  the  real  cost  of  making  and  caring 
for  the  investments.  A  case  in  point  is  found  in  the  ex- 
hibits of  the  Equitable.  No  other  investment  expenses 
other  than  taxes,  repairs  and  other  expenses  connected 
with,  the  real  estate  owned  by  the  company  is  reported 
for  five  years,  then  for  one  year  a  half  million  dollars 
is  reported  as  the  investment  expense.  Then  for  the 
next  year,  no  such  expense  is  reported.  The  exhibits 
of  the  Aetna,  Berkshire,  John  Hancock,  and  a  half 
dozen  others  show  similar  discrepancies  regarding  the 
investment  expenses.  Thus  twelve  of  the  twenty-nine 
companies  which  we  are  studying  made  reports  which 
for  some  of  the  years  are  on  the  face  of  them  incorrect 
as  showing  the  total  expense  arising  from  the  invest- 
ments. 

Inaccurate  as  the  exhibits  are  known  to  be,  it  has 
been  considered  worth  while  to  compile  the  following 
tables.  With  the  expenses  divided  into  three  classes, 
taxes  on  real  estate,  repairs  on  real  estate,  and  other 
investment  expenses,  it  is  possible  to  distinguish  many 
of  the  amounts  which  are  too  small.  Besides  with  a 
number  of  companies,  the  reports  do  show  something. 
In  these  tables,  the  material  has  been  gathered  from 
the  gain  and  loss  exhibits  given  in  the  Connecticut  In- 
surance Eeports  from  1896  to  1901  and  for  the  last 
three  years  from  the  Wisconsin  and  Minnesota  reports, 


116 


THE  COST  OF  INVESTMENTS. 


as  the  Connecticut  reports  no  longer  contain  the  gain 
and  loss  exhibit. 

It  is  impossible  to  get  complete  statistics  for  each 
of  the  twenty-nine  companies,  as  not  all  of  them  during 
the  nine  years  were  doing  business  in  a  state  which 
required  the  gain  and  loss  exhibit. 

RATIO  OF  TOTAL  INVESTMENT  EXPENSES  TO 
TOTAL  ASSETS. 


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1896 

.58 

.21 

.62 

.48 

.41 

.78 

.91 

.67 

.28 

.54 

1897 

.06 

.20 

.85 

.37 

.37 

.49 

.97 

.58 

.39 

1.11 

1898 

.06 

.30 

.88 

.31 

.39 

.51 

.67 

.52 

.38 

.42 

1899 

.09 

.41 

.74 

.35 

.51 

.53 

.55 

.67 

.36 

.46 

1900 

.23 

.38 

.77 

.31 

.49 

.55 

.49 

.75 

.33 

.59 

1901 

.17 

.49 

.77 

.42 

.48 

.49 

.46 

.86 

.30 

.58 

1902 

.17 

.... 

.73 

.27 

.54 

.71 

.29 

.84 

.28 

.51 

1903 

.16 

.84 

.29 

.57 

.68 

.34 

.92 

.27 

.54 

1904 

.15 

.84 

.28 

.53 

.55 

. .   .. 

.91 

.28 

.51 

RATIO  OF  TOTAL  INVESTMENT  EXPENSES  TO 
TOTAL  ASSETS. 


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1897 

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.57 

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.23 

.32 

.61 

.33 

1898 

.33 

.38 

.99 

.34 

.24 

.31 

.98 

.43 

1899 

.33 

.42 

.84 

.33 

.22 

.35 

.44 

.56 

1900 

.35 

.51 

.80 

.47 

.29 

.35 

.97 

.44 

1901 

.46 

.50 

.69 

.44 

.41 

.28 

.69 

.34 

1902 

.49 

.38 

.51 

.61 

.44 

.63 

.25 

.28 

.67 

.30 

1903 

.51 

.36 

.49 

.49 

.45 

.36 

.26 

.75 

.62 

.26 

1904 

.49 

.34 

.49 

.42 

.44 

.38 

.22 

.44 

.61 

.23 

THE  COST  OF  INVESTMENTS. 

RATIO  OF  TOTAL  INVESTMENT  EXPENSES  TO 
TOTAL  ASSETS. 


117 


-w-g 

"3 

■ 
0) 

a  a   . 

2®  a 

a  & 
11 

9 

a 

® 

3 

| 

E 

£ 
> 

i 

g 

o  a 

§1 

fa 

CO 

■as 

aa2 

if 

H 

a* 

£ 

Pui 

3 

^ 

0 

& 

& 

s 

1896 

.29 

.66 

1.76 

.40 

3.75 

.61 

.63 

.13 

1897 

.33 

.59 

.55 

.70 

.68 

.52 

.31 

.50 

.44 

1898 

.31 

.50 

.53 

.36 

.87 

.74 

.28 

.48 

.44 

1899 

.20 

.52 

.57 

.39 

.59 

.86 

.25 

.51 

.61 

1900 

.27 

.40 

.74 

.50 

.70 

.93 

.33 

.33 

.68 

1901 

.21 

.40 

.82 

.42 

.70 

.67 

.84 

.44 

1.25 

1902 

.22 

2.12 

.76 

.35 

.77 

.77 

.38 

.51 

1.30 

1903 

2.55 

.79 

.36 

.51 

.58 

.35 

.54 

1.02 

1904 

2.77 

.53 

.41 

.59 

.40 

1.16 

The  tables  show  that  the  cost  of  caring  for  the  invest- 
ments should  not  be  neglected  in  studying  the  earning 
power  of  the  assets.  One  company  for  one  year  had 
an  investment  expense  equal  to  more  than  three  per  cent, 
of  its  mean  assets  for  that  year.  Three  of  the  rates  per 
cent,  of  cost  to  mean  assets  as  shown  by  the  tables  were 
between  two  and  three  per  cent.,  six  have  been  during 
the  nine  years  above  one  per  cent,  but  below  two,  and 
twenty-three  of  the  annual  expense  rates  have  been 
between  three-quarters  of  one  per  cent,  and  one  per  cent. 
The  deduction  of  these  amounts  from  the  rate  of  earn- 
ing power  makes  a  serious  change  in  that  rate.  In 
fact  the  tables  show  that  if  the  figures  for  those  years 
in  which  the  companies  reported  no  other  investment 
expense  than  that  connected  with  real  estate  be  thrown 
out  it  is  found  that  ninety-four  of  the  annual  rates  of 
investment  expense  have  been  above  one-half  of  one  per 


US  THE  COST  OF  IN VESTMENTS. 

cent,  and  one  hundred  and  two  below  one-half  of  one 
per  cent.  In  other  words,  from  the  rate  of  earnings  for 
the  total  assets  found  in  the  preceding  chapter  must  be 
subtracted  at  least  one-half  of  one  per  cent,  to  get  the 
net  earning  rate. 

An  investment  expense  of  five-tenths  per  cent,  of  the 
investment  is  high.  In  seeking  a  cause  for  this  large 
cost  a  slight  investigation  is  sufficient  to  show  that  with 
most  companies  real  estate  absolutely  owned  by  them 
is  responsible  for  a  considerable  portion  of  the  total 
investment  expense.  There  are  fifteen  companies  whose 
investment  expenses  during  the  nine  years  have  averaged 
more  than  five-tenths  per  cent,  of  mean  assets.  If  these 
fifteen  are  examined  as  to  the  amounts  of  real  estate 
they  own,  it  is  found  that  ten  of  them  own  large 
amounts,  an  amount  in  each  case  forming  a  larger  per- 
centage of  their  total  assets  than  seven  per  cent,  the 
average  for  all  the  companies.  Indeed  every  company, 
except  three,  which  had  relatively  large  real  estate  hold- 
ings during  the  period  under  study,  has  had  an  expense 
ratio  above  five-tenths  of  one  per  cent.  The  close  rela- 
tion between  large  amounts  of  real  estate  and  a  high  in- 
vestment expense  is  thus  seen.  So  important  is  this 
relation  that  it  has  been  thought  best  to  make  separate 
tables  showing  the  real  estate  expenses  and  then  con- 
sider the  expenses  attached  to  other  classes  of  invest- 
ments. 


THE  COST  OF  INVESTMENTS. 


119 


RATIO  OF  TAXES,  REPAIRS  AND  OTHER  EXPENSES  ON 
REAL  ESTATE  TO  MEAN  AMOUNT  OF  REAL  ESTATE. 


1896 

1900 

1904 

Aetna 

'6.1 
3.3 
3.6 
2.4 
3.0 
2.2 
3.4 
2.1 
2.5 
1.9 

13.7 
4.5 
3.6 
2.4 
3.7 
2.9 
3.9 
*   2.5 
5.0 
2.5 

6.5 

Berkshire 

Connecticut  Mutual 

Equitable 

4.0 
2.5 

Germania 

4.3 

Home 

2.9 

John  Hancock 

Manhattan 

"  "2.5 

Massachusetts 

2.1 

Metropolitan 

Michigan 

2.8 
5.3 

Mutual  Benefit 

2.9 
2.9 
5.0 
3.3 
1.9 
5.1 

3.8 
3.2 
5.5 
4.6 
2.5 
8.1 

3.5 

Mutual  N.  Y 

National 

New  England  

2.7 
5.0 
4.9 

New  York 

3.1 

7.5 

Pacific 

3.5 

Penn 

2.0 
4.1 
1.6 
5.0 
4.1 
4.1 
29.9 
3.5 

6.3 
3.7 
2.0 
2.7 
3.8 
2.7 
8.1 
2.4 
1.5 
3.3 
1.6 

5.6 

Phoenix 

2.8 

Provident  Life  and  Trust 

Provident  Savings.    .... 
Prudential 

7.7 
3.5 

State 

Travelers' 

14.2 

Union  Central 

3.7 

2.4 

United  States 

1.9 
1.6 

Washington 

2.8 

We  have  already  seen  how  unfavourably  the  gross 
earnings  from  real  estate  compare  with  the  earnings  of 
other  classes  of  assets.  It  was  pointed  out  in  the  study 
of  the  gross  earning  power,  how  the  rate  from  real  es- 
tate had  increased  during  the  last  ten  years,  but  when 


1  Figures  are  for  1897. 


120  THE  COST  OF  INVESTMENTS. 

the  deduction  for  expenses  is  made  from  the  gross 
earnings  it  is  seen  how  very  little  real  estate  actually 
returns  in  net  income.  In  the  preceding  tables  only 
seven  of  the  annual  rates  of  expense  to  mean  value  of 
real  estate  are  below  two  per  cent.  Seventeen  annual 
rates  are  above  five  per  cent.,  and  the  average  during  the 
nine  years  for  all  the  companies  is  nearly  four  per 
cent,  of  the  value  for  each  year.  So  heavy  is  the  ex- 
pense connected  with  real  estate  such  as  life  insurance 
companies  possess  that  in  the  three  years  selected  for 
the  above  table,  the  expenses  exceeded  the  rents  received 
from  the  property  twenty-two  times. 

It  is  unfortunate  that  we  cannot  get  as  good  an  indi- 
cation of  the  expenses  attending  the  investment  of  other 
classes  of  assets  as  we  have  here  obtained  for  real  estate. 
It  is  harder  to  find  such  costs  than  it  is  to  find  the  total 
investment  expenses  of  a  company,  and  the  extreme 
difficulty  in  finding  such  expenses  has  been  indicated. 
The  best  that  we  can  do  in  learning  the  expenses  con- 
nected with  particular  classes  of  assets  is  to  find  the  ex- 
pense for  all  assets  excluding  real  estate  and  then  see 
if  any  relation  can  be  traced  between  the  expense  ratio 
of  the  companies  and  the  specific  classes  of  assets  which 
those  companies  largely  possess.  The  following  table 
shows  the  rate  per  cent,  of  expenses  to  total  assets,  ex- 
cluding in  each  item  the  real  estate. 


THE  COST  OF  INVESTMENTS. 


121 


PER   CENT.  OF  INVESTMENT   EXPENSES   OTHER  THAN 

REAL  ESTATE  TO  MEAN  ASSETS  MINUS 

REAL  ESTATE. 


1896 

1900 

1904 

Aetna 

0.10 
0.14 

0.11 

Connecticut  Mutual 

0.17 

0.20 

Equitable 

0.04 

Germania 

0.16 

Home 

0.45 
0.42 
0.06 
0.21 
0.02 

0.20 
0.13 
'0.16 
0.23 
0.16 

0.28 

John  Hancock 

Manhattan 

0.14* 
0.18 

Massachusetts 

0.23 

Metropolitan 

0.15 

Michigan 

0.26 

Mutual  Benefit 

0.26 
0.19 

0.36 
0.12 

0.35 

Mutual  of  New  York 

0.13 

National 

0.20 

New  England 

0.13 

New  York 

0.06 
0.53 

0.13 
0.09 

0.26 

Northwestern 

0.08 

Pacific 

0.23 

0.50 

0.61 
0.23 
0.13 

0.37 

Phoenix 

0.13 

Provident  Life  and  Trust 

Provident  Savings 

0.31 

0.203 
0.15 

0.152 

State 

0.13 

0.131 

0.12 

Union  Central 

0.51 
0.44 
0.44 

0.87 
0.08 
0.08 
0.18 

0.55 

0.14 

United  States 

0.141 

Washington 

Ten  of  the  companies  in  1904  reported  an  investment 
expense  connected  with  mortgages,  bonds,  stocks,  policy 
loans,  etc.,  all  the  assets  except  real  estate,  equal  to  one- 


1  Business  of  1903. 

2  Business  of  1901. 
8  Business  of  1903. 


122  THE  COST  OF  INVESTMENTS. 

fifth  of  one  per  cent,  on  the  mean  value  of  the  assets. 
Seventeen  others  reported  a  less  percentage,  in  several 
cases  an  amount  so  small  that  it  does  not  represent  the 
real  investment  expense.  We  saw  in  an  earlier  chapter 
that  there  are  five  companies  which  have  practically 
half  or  more  of  their  assets  invested  in  real  estate  loans. 
The  Union  Central  is  one  which  has  practically  all  its 
assets  in  this  form.  The  above  table  shows  the  Union 
Central  reporting  the  highest  rate  per  cent,  of  invest- 
ment expenses.  The  Mutual  Benefit,  the  other  large 
company  which  has  kept  about  one-half  of  its  assets 
invested  in  mortgage  loans,  stands  third  in  the  list  of 
investment  expense.  The  Michigan  Mutual  stands 
fourth.  The  average  expense  for  the  iive  companies 
having  relatively  large  mortgage  holdings  is  0.38  of  one 
per  cent. 

There  are  eight  companies  which  have  more  than  one- 
half  of  their  assets  invested  in  bonds  and  stocks.  These 
eight  reported  an  average  investment  expense  of  0.14  of 
one  per  cent.  This  makes  a  difference  of  0.22  of  one 
per  cent,  in  the  rate  of  investment  expense  between 
those  companies  which  as  one  extreme  have  mostly  mort- 
gages and  those  which  have  a  large  amount  of  bonds 
and  stocks.  If  we  consider  only  two  companies,  the 
Union  Central  with  mor3  than  eighty  per  cent,  of  its 
assets  in  mortgage  loans,  and  the  New  York  Life  with 
more  than  seventy  per  cent,  of  its  funds  in  bonds  about 


THE  COST  OF  INVESTMENTS.  123 

the  same  difference  in  expense  of  investment  will  be 
found  as  by  taking  the  average  of  several  companies. 
Both  of  these  companies  in  1904  reported  liberal 
amounts  as  investment  expenses.  The  difference  for 
that  year  in  the  rate  of  the  two  companies  is  twenty- 
nine  hundredths  of  one  per  cent.  Roughly  measured 
then  there  is  a  difference  of  about  one-quarter  of  one 
per  cent,  in  the  expense  of  investing  a  large  percentage 
of  the  assets  in  real  estate  loans  compared  with  the  ex- 
pense of  similar  large  investments  in  bonds  and  stocks. 
The  expense  of  investing  the  other  classes  of  assets 
cannot  even  be  roughly  measured  from  the  statistics 
given  in  the  official  annual  reports.  Returning  to  the 
total  investment  expense,  we  find  that  the  twenty-nine 
companies  which  we  have  been  considering  had  as  a 
whole  an  expense  for  investments  in  1904,  a  rate  of 
thirty-six  hundredths  of  one  per  cent,  of  their  total 
mean  assets  of  that  year.  In  1900,  the  companies  trans- 
acting business  in  Connecticut  had  an  expense  ratio  of 
forty-three  hundredths  of  one  per  cent.  In  1903,  the 
forty  companies  reporting  to  the  Minnesota  department 
of  insurance  had  an  expense  equal  to  forty-one  hun- 
dredths of  one  per  cent,  of  total  assets.  As  we  pointed 
out  when  examining  the  rates  of  the  individual  com- 
panies forty-hundredths  of  one  per  cent,  is  a  high  in- 
vestment expense  ratio.     Especially  is  this  true,  if,  as 


124  THE  COST  OF  INVESTMENTS. 

has  been  stated/  the  actual  expenses  involved  in  the 
handling  of  the  investments  are  in  excess  of  the  amounts 
reported  to  the  insurance  departments  to  the  extent  of 
at  least  one-quarter  of  one  per  cent. 

We  can  get  some  idea  of  what  is  an  economical  in- 
vestment expense  ratio  by  a  study  of  savings  banks.  At 
the  end  of  1904  the  savings  banks  in  the  State  of  New 
York  had  assets  amounting  to  one  and  one-fourth  bil- 
lion dollars.  This  amount  was  held  by  one  hundred 
and  twenty-eight  banks,  and  the  salary  expenses  of  these 
institutions  for  all  purposes  amounted  to  only  seventeen- 
hundredths  of  one  per  cent,  of  the  total  assets.  The  en- 
tire expense  of  the  banks  for  salaries,  taxes,  etc., 
amounted  to  twenty-nine  hundredths  of  one  per  cent. 
Even  with  this  small  ratio,  these  banks  had  forty-three 
per  cent,  of  their  assets  invested  in  mortgage  loans, 
thirty-four  per  cent,  in  public  bonds,  and  only  fourteen 
per  cent,  in  railroad  bonds,  the  least  expensive  to 
handle,  and  of  which  the  insurance  companies  possess 
so  largely. 

The  savings  banks  in  Massachusetts  since  1884  have 
not  had  an  expense  ratio  outside  of  taxes  for  any  year 
greater  than  one-fourth  of  one  per  cent,  of  the  total 
assets  held  by  them.  The  number  of  institutions  has 
averaged  more  than  one  hundred  and  eighty.     Thus 

1  D.  H.  Wells  Transactions  of  the  Actuarial  Society  of  America 
Volume  6,  Pages  335-6. 


THE  COST  OF  INVESTMENTS.  125 

with  average  assets  of  less  than  two  million  dollars 
at  the  beginning  of  the  period  and  less  than  three  and 
one-half  million  at  the  present  time,  with  forty  per 
cent,  on  the  average  invested  in  mortgage  loans,  these 
institutions  have  been  able  to  perform  all  the  functions 
of  a  savings  bank,  such  as  receiving  deposits,  investing 
the  assets,  paying  the  dividends,  all  this  with  an  ex- 
pense ratio  of  about  half  the  rate  which  the  insurance 
companies  incur  for  investment  expenses  alone. 

The  low  expense  ratio  of  the  savings  banks  can  be 
explained  to  some  extent  by  the  small  amount  of  real 
estate  which  they  hold.  We  have  seen  that  the  insur- 
ance companies  with  large  assets  have  five  per  cent,  at 
least  of  their  total  funds  tied  up  in  real  estate  for  busi- 
ness purposes.  The  Massachusetts  savings  banks,  de- 
spite the  larger  number  of  them,  and  their  smaller  as- 
sets, have  less  than  one  per  cent,  of  their  funds  invested 
in  real  estate  for  business  purposes,  and  little  more  than 
one-half  of  one  per  cent,  more  in  real  estate  acquired 
through  foreclosure. 

If  the  insurance  companies  could  dispose  of  much  of 
their  real  estate,  and  thus  lessen  the  expenses'  connected 
Avith  it,  the  investment  expense  ratio  would  be  lessened. 
Outside  of  real  estate,  the  insurance  companies,  so 
far  as  the  official  reports  indicate,  have  not  a  heavy 
investment  expense.  In  fact  a  higher  expense  might 
be  justified  by  a  higher  rate  of  earning  power.     The 


126  THE  COST  OF  INVESTMENTS, 

Union  Central  with  an  earning  rate  of  over  six  per 
cent,  cannot  be  reproached  for  an  investment  expense  of 
one-half  of  one  per  cent.  Doubtless,  with  other  com- 
panies, a  larger  expense  for  investment,  if  incurred 
along  different  lines  than  at  present,  would  be  more  than 
made  up  by  the  higher  rate  of  earning  power  which 
could  be  secured. 


CHAPTEK  V. 

FAILURES  OF  LIFE  INSURANCE  COMPANIES. 

rA  study  of  life  insurance  companies  which  have 
failed  is  of  value  in  a  study  of  the  investments  from 
two  points  of  view.  In  the  first  place,  the  history  of 
these  companies  offers  many  lessons  to  present  man- 
agements as  to  what  investments  should  or  should  not 
be  made.  In  the  second  place,  the  legislator  by  study- 
ing the  investment  history  of  the  insolvent  companies 
of  the  past  can  learn  how  far  a  repetition  of  those  fail- 
ures can  be  avoided  by  legal  regulations. 

Insurance  failures,  as  will  be  seen  from  a  study  of 
the  individual  companies,  have  been  only  partly  due  to 
the  investment  side  of  the  business.  ~No  matter  how 
well  the  investments  are  made,  if  the  company  is  reck- 
less in  its  acceptance  of  risks  which  leads  to  a  death 
rate  much  greater  than  that  expected  from  the  mortality 
table  it  will  fail.  Then  too,  a  company  is  always  ex- 
posed to  the  dishonesty  or  mismanagement  on  the  part 
of  the  officials  controlling  the  company.  Mismanage- 
ment often  leads  to  a  high  expense  to  get  new  business, 
exorbitant  salaries  and  similar  expenses  which  bring 

127 


128    FAILURES  OF  LIFE  INSURANCE  COMPANIES. 

the  company  to  a  condition  of  insolvency,  and  dishonest 
officials  may  exploit  the  assets  of  the  company  they  con- 
trol for  their  own  private  advantage.  Again  invest- 
ments may  be  reasonably  well  made,  but  a  financial 
crisis  may  upset  values  to  such  an  extent  that  the  assets 
depreciate  and  become  less  than  liabilities.  So  far  as 
failures  have  been  due  to  excessive  mortality,  or  to 
a  ruinous  expense  ratio,  this  chapter  will  not  be  par- 
ticularly concerned,  but  where  they  have  been  due  to 
mismanagement  of  the  assets,  poor  investments,  or  to 
financial  crises,  some  attention  will  be  devoted  to  them. 

Every  life  insurance  company  which  commenced 
business  before  1840,  with  one  exception,  failed  or 
changed  the  character  of  its  business.  A  number  of  the 
companies  which  were  chartered  during  that  period  did 
scarcely  more  than  organise  and  then  wound  up  their 
affairs.  Those  which  changed  the  character  of  their 
business  subsequently  paid  off  the  few  insurance  claims 
which  they  had  assumed  as  the  policies  matured.  A 
few  failed  outright,  but  they  had  done  so  small  a  busi- 
ness that  barely  a  record  of  their  names  is  left.  Fail- 
ures of  life  insurance  companies  numbered  one  in  1836, 
two  in  1840,  one  in  1848,  and  two  again  in  the  follow- 
ing year.1 

In  1853,  the  Eagle  Life  and  Health  of  Jersey  City 

1  The  United  States  Insurance  Gazette  1869,   Volume  XXX, 
Page  21. 


FAILURES  OF  LIFE  INSURANCE  COMPANIES      129 

failed.  It  had  been  organised  in  1847  for  the  purpose 
of  writing  health  insurance,  but  frauds  on  the  part  of 
the  applicants  became  so  numerous  that  the  scheme  was 
abandoned.  A  few  years  later  the  Kentucky  Mutual, 
one  of  the  first  companies  in  the  West,  became  insolv- 
ent. This  company  offered  insurance  at  rates  only 
three-fourths  as  high  as  the  ordinary  rates,  and  after  six 
years  of  experience,  its  deficiencies  became  so  great  that 
it  was  compelled  to  wind  up  its  business. 

In  1857,  occurred  one  of  the  most  notable  failures  of 
the  day.  The  Ohio  Life  and  Trust  Company,  chartered 
twenty  years  earlier,  had  built  up  an  extensive  business 
and  had  accumulated  considerable  assets.  These  had 
been  used  largely  in  the  construction  of  railroads  which 
was  then  going  on  rapidly.  When  the  panic  of  1857  set 
in,  the  Ohio  Life  and  Trust  Company  was  almost  the 
first  corporation  to  become  insolvent. 

During  the  next  ten  years,  there  were  no  failures 
of  life  insurance  companies  worth  mentioning.  Then 
came  a  period  during  which  company  after  company 
failed.  In  order  to  understand  these  numerous  failures, 
it  is  necessary  to  know  something  of  the  growth  of  life 
insurance  in  the  ten  years  preceding  1870.  In  the 
forties,  a  few  companies  for  the  first  time  were  estab- 
lished on  a  firm  basis.  There  were  serious  defects  in 
their  methods  of  carrying  on  the  business,  but  the  com- 
panies managed  to  live,  and  with  experience  the  weak- 
9 


130    FAILURES  OF  LIFE  INSURANCE  COMPANIES. 

nesses  were  discovered  and  remedied.  From  1850-60 
a  number  more  companies  were  organised.  The  possi- 
bilities of  the  system  had  been  proven  and  life  insurance 
became  an  established  business.  In  this  decade  there 
was  a  genuinely  healthy  growth.  Able  men  were  at- 
tracted to  the  business,  as  is  evidenced  by  the  fact  that 
no  less  than  twenty-one  of  the  most  prominent  com- 
panies of  to-day  were  organised  in  the  two  decades 
prior  to  1861. 

With  the  outbreak  of  the  Civil  War,  there  were  grave 
doubts  among  the  managers  of  the  companies  as  to  its 
effect  upon  their  business.  A  large  territory  was  cut  off 
from  communication,  and  thousands  of  men  were  going 
into  a  hazardous  occupation.  The  result  was  not  what 
was  expected.  Life  insurance  business  prospered  as  it 
had  never  prospered  before.  Just  why  it  suddenly  be- 
came so  popular  is  a  matter  of  much  conjecture.  In- 
surance is  an  institution  of  real  value,  but  it  has  never 
forced  its  claims  upon  people  so  rapidly  as  it  did  for  a 
few  years  just  before  and  immediately  after  the  close  of 
the  Civil  War.  However  what  may  have  been  the  cause 
of  the  popularity  of  life  insurance  at  that  time,  it  made 
the  companies  which  were  in  the  field  exceedingly  pros- 
perous. 

The  result  was  exactly  the  same  as  has  been  found  in 
other  lines  of  business  in  this  country.  ~No  business 
can  show  unwonted  prosperity  without  attracting  a  flood 


FAILURES  OF  LIFE  INSURANCE  COMPANIES.     131 

of  competitors.  This  took  place  in  life  insurance  dur- 
ing the  late  sixties.  Adventurers,  speculators,  and  men 
who  had  failed  in  other  enterprises,  seeing  the  success 
of  the  score  of  companies  already  in  the  field,  hastened 
to  form  new  ones.  In  the  closing  year  of  the  Civil  War 
nine  new  companies  were  organised.  In  the  following 
year  thirteen  more  were  brought  into  the  field,  thus 
almost  doubling  in  the  short  space  of  two  years  the  num- 
ber of  life  insurance  corporations.  Still  greater  growth 
came,  no  less  than  nineteen  companies  being  organised 
in  1867,  and  the  record  of  that  year  was  duplicated  in 
the  next.  The  following  year  saw  the  end  of  the  move- 
ment, but  not  until  eleven  more  companies  had  been 
organised. 

Thirty  years  earlier  life  insurance  had  been  repre- 
sented by  one  or  two  feeble  companies.  At  the  close  of 
1869,  one  hundred  and  ten  were  competing  for  busi- 
ness. That  is  more  companies  than  are  existing  in  the 
United  States  even  to-day,  although  the  business  has 
increased  many  fold. 

Even  if  the  country  as  a  whole  had  not  soon  suffered 
one  of  the  most  severe  depressions  it  has  ever  exper- 
ienced, there  would  probably  have  been  trouble  in  the 
life  insurance  business.  The  growth  in  the  number 
of  companies  had  been  too  rapid,  and  too  many  of  the 
new  companies  were  managed  by  incapable  men. 
Many  of  the  companies  had  been  brought  into  existence 


132    FAILURES  OF  LIFE  INSURANCE  COMPANIES. 

for  the  sole  purpose  of  furnishing  lucrative  positions  to 
the  men  who  organised  them.  Most  of  the  new  man- 
agers knew  scarcely  anything  of  the  principles  of  life 
insurance,  and  even  in  the  cases  where  honest  manage- 
ment was  desired,  the  business  was  often  conducted  un- 
wisely. In  some  instances  honesty  was  never  intended, 
and  with  these  companies  mismanagement  was  the  rule. 
The  organisers,  whether  their  intentions  were  honest 
or  fraudulent,  secured  for  the  new  companies  imposing 
boards  of  directors  and  trustees  made  up  of  men  promi- 
nent in  the  financial  or  political  world.  These  men 
through  solicitation  allowed  their  names  to  be  connected 
with  the  new  companies,  but  they  took  little  interest  in- 
the  management  of  them. 

The  results  of  the  ignorance  and  mismanagement  on 
the  part  of  the  officials  and  the  lack  of  interest  on  the 
part  of  directing  boards  were  soon  forthcoming.  In 
1868,  even  while  new  companies  were  still  being  organ- 
ised, three  failed,  one  insured  in  another  company 
which  subsequently  failed,  and  one  was  closed  at  the 
suit  of  the  stockholders,  and  in  1870  these  were  fol- 
lowed by  seven  more.  There  was  a  slight  improvement 
in  1871  when  but  two  companies  were  forced  out  of 
existence,  but  the  disaster  was  but  begun.  In  1872, 
thirteen  companies  failed  or  reinsured  in  companies 
which  failed.  Thus  before  the  financial  depression 
which  affected  all  lines  of  business  ha3  begun  thirty 


FAILURES  OF  LIFE  INSURANCE  COMPANIES.    133 

life  insurance  corporations  had  failed.  When  the  gen- 
eral hard  times  did  set  in,  and  failures  in  all  lines  of 
business  became  frequent,  the  rate  of  insurance  failures 
was  accelerated.  In  1873  fourteen  life  companies  were 
placed  in  the  hands  of  receivers,  in  1874  four  failed, 
in  1875  nine,  and  in  the  succeeding  year  a  similar 
number  became  insolvent.  Six  companies  went  to  the 
wall  in  1877,  making  a  total  of  seventy-one  life  insur- 
ance corporations  which  had  failed  in  ten  years. 

The  weaker  companies  had  been  weeded  out  and 
failures  became  less  frequent.  The  year  1878  recorded 
but  a  single  insolvent  company,  and  1879  and  1880 
each  had  but  two.  Between  1880  and  1890  a  few  more 
companies,  rather  prominent  ones,  failed  mostly  as  a 
result  of  conditions  arising  in  the  previous  decade. 
Since  1890  no  company  of  any  significance  has  become 
insolvent.  In  all  since  the  Civil  War,  a  few  over  eighty 
companies  have  gone  out  of  existence  through  receiver- 
ship proceedings,  in  addition  to  fourteen  which  have 
passed  out  by  the  more  creditable  process  of  reinsurance 
in  companies  which  have  survived. 

It  would  be  of  little  value  to  examine  the  history  of 
all  of  these  companies  which  have  failed.  Many  of  them 
were  too  small  to  have  any  importance  individually,  and 
their  history  is  tediously  similar.  Nearly  all  those  com- 
panies which  were  organised  between  1865  and  1869 
failed  before  1875.     Their  history  means  little  in  a 


134    FAILURES  OF  LIFE  INSURANCE  COMPANIES. 

study  of  investments,  for  most  of  them  never  accumu- 
lated a  million  dollars  of  assets.  Organised  by  specu- 
lators and  managed  by  incapable  men,  they  did  not  fail 
because  of  any  epidemic  among  the  policy-holders,  or 
because  of  a  financial  crisis,  but  because  there  was  no 
room  for  so  many  companies,  and  the  weakest  were 
forced  out  of  existence.  The  causes  of  the  popularity 
of  insurance  during  the  later  war  period  had  disap- 
peared, the  great  profits  from  insuring  had  not  material- 
ised to  the  policy-holders,  and  the  amount  of  insurance 
in  force  began  to  decline  with  even  some  of  the  strong- 
est companies  as  early  as  1868.  Hence  it  was  not 
strange  that  the  young  companies,  mismanaged,  with  a 
high  expense  ratio,  and  with  salary  lists  rivaling  the 
larger  companies  became  insolvent 

The  year  1875  marks  the  beginning  of  a  number  of 
important  failures.  Certain  companies  with  consider- 
able assets  had  showed  signs  of  weakness  and  with  the 
continued  hard  times  began  to  become  insolvent.  In  the 
history  of  nearly  every  one  of  these  larger  failures, 
something  of  interest  from  the  investment  standpoint 
can  be  gained. 

The  first  large  company  to  succumb  was  the  North 
America  Life  of  New  York.  In  previous  years  the 
officers  of  the  company  had  loaned  practically  all  its 
funds  on  real  estate  security  at  what  proved  to  be  a 
speculative  valuation.     This  real  estate  was  all  located 


FAILURES  OF  LIFE  INSURANCE  COMPANIES.     135 

in  New  York  or  adjacent  to  New  York  city,  but  this 
did  not  prevent  a  depreciation  in  its  value  so  great  that 
the  North  America  had  to  foreclose  its  loans  at  such 
a  loss  in  value  and  in  revenue  as  to  cause  its  insolvency. 

In  October  of  the  following  year  the  Continental  of 
New  York  was  closed  at  the  suit  of  a  stockholder.  This 
company  had  been  organised  in  1865  and  had  made  a 
rapid  growth  but  one  which  had  been  dearly  purchased. 
This  kept  assets  dangerously  near  to  liabilities,  and 
when  mismanagement  of  the  investments  brought  its 
certain  results,  the  company  was  compelled  to  cease 
business.  Its  particular  investment  ills  were  a  costly 
home  office  building,  mortgage  loans  which  had  brought 
in  but  one  and  one-half  per  cent,  interest  on  the  invest- 
ment since  1871,  collateral  loans  on  the  security  of  its 
own  stock,  and  wrong  relations  with  banks  which  the 
insurance  company  controlled.  As  a  result,  its  assets, 
which  had  been  valued  at  six  million  dollars,  shrunk  to 
two  and  one-half  millions  when  subjected  to  the  scrutiny 
of  the  receiver. 

In  the  same  year,  the  Security  Life  and  Annuity,  also 
of  New  York,  was  closed  by  the  Attorney-General.  In 
this  case  failure  was  due  almost  entirely  to  the  insur- 
ance side  of  the  business  and  not  to  the  investments. 
Eisks  had  been  accepted  which  ought  to  have  been  re- 
jected, new  business  ceased,  outgo  became  larger  than 
income,  and  the  company  was  forced  to  realise  on  its 


136    FAILURES  OF  LIFE  INSURANCE  COMPANIES. 

assets  at  a  time  when  such  a  transaction  meant  a  ruin- 
ous loss. 

In  1877,  the  Universal  became  insolvent,  being  the 
fourth  large  company  in  New  York  to  fail  within  a  few 
years.  Its  failure  was  due  to  causes  very  similar  to 
those  affecting  the  North  America.  In  1875,  the 
Universal  reported  four  and  one-half  million  dollars 
of  assets,  two  millions  of  which  consisted  of  mortgage 
loans,  and  no  real  estate  whatever  was  owned.  A  year 
and  a  half  later  it  had  only  a  million  dollars  in  mort- 
gages and  real  estate  to  more  than  a  million  dollars.  In 
eighteen  months,  the  company  had  been  forced  to  fore- 
close more  than  one-half  of  its  loans  on  real  estate,  and 
the  consequent  loss  marked  the  end  of  its  career. 

The  New  Jersey  Mutual' s  history  offers  an  interest- 
ing lesson  to  legislators  believing  in  strict  legal  control 
of  the  investments.  The  charter  of  this  company,  which 
failed  in  1877,  limited  its  investments  to  mortgage 
loans,  United  States,  state  and  city  bonds,  a  limitation 
about  as  strict  as  could  well  be  imposed.  Yet  its  officers 
easily  evaded  the  law,  lent  the  funds  in  violation  of  the 
charter  regulations,  and  exploited  the  company  of  its 
assets  about  as  rapidly  as  could  have  been  done  without 
any  legal  regulations  whatever.  "Wrecking  of  life  in- 
surance companies  had  become  a  profitable  undertak- 
ing to  shrewd  and  unprincipled  men,  and  the  freedom 
allowed  to  the  officers  of  the  companies  by  quiescent 


FAILURES  OF  LIFE  INSURANCE  COMPANIES.     137 

policy-holders  and  "  dummy  "  boards  of  directors  made 
such  wrecking  easily  possible  in  spite  of  the  strictest 
sort  of  legal  regulations. 

The  failure  of  the  Life  Association  of  St.  Louis 
should  be  noticed,  because  the  failure  was  ascribed  to  its 
peculiar  system  of  investment.  There  was  a  strong 
demand  forty  years  ago  that  reserves  should  be  invested 
in  the  state  where  they  originated.  The  Life  Associa- 
tion, responding  to  this  demand,  organised  state  de- 
partments of  the  company.  Under  this  arrangement 
each  department  was  to  invest  the  reserves  on  the 
policies  in  each  state  within  that  state.  The  result  was 
that  the  assets  were  scattered  in  every  state  where  the 
company  did  business.  The  rate  of  interest  income 
for  a  while  was  exceedingly  favourable,  but  the  addi- 
tional expense  and  trouble  of  managing  the  investments 
was  fatal  to  the  plan.  Collections  of  interest,  fore- 
closures and  sales  were  difficult,  and  the  home  office 
could  not  direct  the  investment  policy  as  it  should  have 
done.  Insecure  loans  were  made,  and  these,  coupled 
with  other  weaknesses  in  the  company,  produced  in- 
solvency. 

It  is  not  necessary  to  dwell  long  on  the  failure  of  the 
Globe  of  New  York  in  1879.  The  failure  of  no  other 
company  shows  more  clearly  the  disastrous  effect  of  an 
alliance  between  an  insurance  company  and  other  cor- 
porations where  the  insurance  money  is  used  to  help 


138    FAILURES  OF  LIFE  INSURANCE  COMPANIES. 

out  the  enterprise  in  which  the  other  corporations  are 
engaged.  The  President  of  the  Globe  was  the  Presi- 
dent of  a  railroad,  and  he  loaned  the  money  of  the  in- 
surance company  freely  to  his  railroad  corporation. 
The  railroad  did  not  succeed  and  the  insurance  com- 
pany was  reduced  to  insolvency. 

In  the  same  way,  the  case  of  the  Piedmont  and  the 
Arlington,  a  Virginia  corporation,  can  be  passed  over 
rapidly.  Like  a  number  of  the  defunct  New  York 
companies  it  had  loaned  extensively  on  real  estate 
which  had  later  so  depreciated  in  value  as  to  cause  the 
failure  of  the  insurance  company. 

The  Knickerbocker  Life,  an  old  company  as  ages 
then  were,  failed  in  the  early  eighties.  Its  failure  was 
due  to  the  utterly  reckless  system  of  investment  pursued 
by  the  Vice-President  of  the  company  between  1865 
and  1870.  He  loaned  on  unsecured  notes  and  on  unim- 
proved real  estate  to  such  an  extent  that  the  company  in 
1880  had  between  three  and  four  million  dollars  of  real 
estate  obtained  through  foreclosure.  When  the  com- 
pany failed  it  had  practically  no  other  assets  than  the 
poor  real  estate  which  had  been  obtained  as  a  result  of 
the  almost  criminal  policy  of  the  management  years  be- 
fore. 

The  next  company  to  fail  was  one  of  such  conse- 
quence that  it  will  be  necessary  to  go  more  deeply  into 
its  history  than  has  been  done  in  the  case  of  other  failed 


FAILURES  OF  LIFE  INSURANCE  COMPANIES.     139 

companies.  A  more  exhaustive  treatment  of  this  com- 
pany is  justifiable,  for  every  investment  manager  should 
know  the  history  of  the  Charter  Oak,  the  largest  insur- 
ance company  which  has  ever  failed  in  the  United 
States.    ^7 

The  Charter  Oak  was  organised  in  1850,  it  passed 
successfully  through  the  difficult  early  years  of  a  life 
company,  and  up  to  1875,  as  an  insurance  institution, 
it  had  been  entirely  successful.  Its  death  rate  had  been 
low,  its  expenses  had  been  below  the  average,  and  it  had 
accumulated  assets  amounting  to  thirteen  and  one-half 
million  dollars.  Yet  in  ten  years  the  Charter  Oak  was 
a  failure,  and  its  liabilities  were  paid  off  at  the  rate  of 
fifteen  cents  on  the  dollar. 

In  seeking  the  causes  of  the  failure  of  the  Charter 
Oak  attention  must  be  directed  entirely  to  the  invest- 
ments, for  it  was  through  the  mismanagement  of  these 
that  the  company  became  insolvent.  Before  taking  up 
the  particular  causes  of  failure,  it  is  well  to  note  that 
the  charter  provisions  regulating  the  investments  were 
strict.  Three-fourths  of  the  funds  had  to  be  invested 
either  in  loans  on  real  estate  worth  double  the  amount 
of  the  loan,  or  in  bonds  of  ~New  York,  Boston,  or  of  the 
cities  in  Connecticut.  The  remaining  fourth  could  be 
loaned  upon  endorsed  promissory  notes  having  not  more 
than  twelve  months  to  run.1 

1  P.  H.  Woodward,  Insurance  in  Connecticut,  Page  82. 


140    FAILURES  OF  LIFE  INSURANCE  COMPANIES. 

The  first  heavy  blow  struck  the  Charter  Oak  in  1875. 
For  some  time  the  banking  firm  of  Allen,  Stephens  and 
Company  of  New  York  had  been  the  depositaries  of  the 
insurance  company.  Besides  a  special  account  which 
the  Charter  Oak  had  with  this  banking  firm,  it  kept  a 
cash  deposit  account  as  well.  In  1874  the  total  deposit 
in  the  New  York  bank  by  the  Charter  Oak  amounted  to 
nearly  a  million  dollars.  Restricted  by  legal  regula- 
tions in  its  investment  field,  the  Charter  Oak  was  financ- 
ing enterprises  through  the  medium  of  a  banking  house. 
In  1875  that  banking  house  failed,  owing  the  Charter 
Oak  its  million  dollars.1  In  the  settlement  of  the  bank's 
affairs,  the  Charter  Oak  got  some  real  estate,  some  mort- 
gages, and  some  stock  in  a  silver  mining  company  in 
Utah.  Thus,  was  the  valuable  cash  asset  of  the  in- 
surance company  changed  into  unrealisable  assets. 

The  Charter  Oak  might  have  stood  the  shock  of  the 
bank  failure  if  its  other  investments  had  been  well 
made,  but  they  were  not.  Back  in  the  sixties,  the  com- 
pany had  erected  a  magnificent  home  office  building  at 
a  cost  of  eight  hundred  thousand  dollars.  As  an  invest- 
ment it  was  a  mistake.  It  never  paid  the  Charter  Oak 
any  fair  return  upon  the  investment,  and  was  later  sold 
to  the  Aetna  at  one-fourth  its  cost.2 

Other  still  more  serious  mistakes  were  made  in  the 

1  Connecticut  Insurance  Report,  1875,  Page  155. 
9  The  Insurance  Monitor,  1888,  Page  232. 


FAILURES  OF  LIFE  INSURANCE  COMPANIES.     141 

management  of  the  investments  of  the  Charter  Oak. 
The  President  of  the  Charter  Oak  originated  the  pro- 
ject of  the  Connecticut  Valley  Railroad  and  became  its 
President.  The  railroad  was  built  and  the  money 
which  could  not  be  secured  by  selling  bonds  and  stocks 
was  borrowed  of  the  Charter  Oak  on  personal  notes. 
Later  these  were  funded  into  second  mortgage  bonds  of 
the  railroad.  The  railroad  was  not  a  success  and  could 
not  pay  the  interest  on  the  bonds.  Therefore  to  give 
the  railroad  business,  Charter  Oak  money  was  used  in 
building  up  a  factory  along  the  road  and  a  summer 
hotel  at  Say  brook.  However,  the  second  mortgage 
bonds  still  received  no  interest  and  the  insurance  com- 
pany had  only  involved  itself  further  by  its  efforts  to 
make  the  railroad  pay. 

Such  repeated  drains  upon  the  resources  of  the  Char- 
ter Oak  could  not  be  withstood.  From  1875  on,  the 
difficulties  of  the  company  increased.  Vigorous  at- 
tempts were  made  to  save  it,  but  they  led  to  worse  en- 
tanglements. The  bonds  of  the  railroad  were  ex- 
changed for  real  estate  in  New  York  city.  Likewise 
eight  hundred  thousand  dollars  in  mortgages  besides  the 
mortgages  on  the  manufacturing  plant  and  four  hun- 
dred and  fifty  thousand  dollars  in  cash  were  traded  for 
New  York  realty.1  By  these  transactions  half  of  the 
Charter  Oak  assets  were  traded  for  real  estate  just  be- 
1  The  Insurance  Spectator,  Volume  18,  Page  29. 


142    FAILURES  OF  LIFE  INSURANCE  COMPANIES. 

fore  a  heavy  depreciation  in  the  value  of  that  asset  took 
place.  As  a  result,  the  Charter  Oak  lost  a  million  and 
a  half  dollars  in  its  trade  for  New  York  real  estate, 
and  a  further  long  step  had  been  taken  toward  irrepar- 
able insolvency. 

Reorganisation  of  the  Charter  Oak  took  place  several 
times  after  the  first  difficulties  in  1875.  Finally  a  sup- 
posedly strong  man  was  put  in  control,  but  conditions  be- 
came worse.  Confidence  is  a  necessary  stock-in-trade 
of  a  life  insurance  company  and  the  Charter  Oak  pos- 
sessed none.  Lapses  and  surrenders  of  policies  went  on 
apace,  an  application  for  a  receiver  was  made  in  1885, 
and  a  year  later,  as  if  the  Charter  Oak  had  not  suf- 
fered enough  already,  its  President  fled  to  Canada,  a 
defaulter  to  the  amount  of  two  million  dollars.  The 
career  of  the  Charter  Oak  was  ended,  and  a  prosperous 
company  had  been  sacrificed  to  private  greed. 

Since  the  Charter  Oak  failure  two  companies  of  some 
importance  have  become  insolvent.  The  Continental  of 
Hartford  failed  in  1887  as  a  result  of  fraudulent  man- 
agement, and  in  1890  the  American  Life  of  Philadel- 
phia was  placed  in  the  hands  of  a  receiver.  The  history 
of  the  latter  company  is  of  interest  as  illustrating  the 
danger  to  which  the  assets  of  a  stock  life  insurance  com- 
pany are  exposed.  A  syndicate  obtained  control  of  the 
majority  of  the  capital  stock  of  the  American,  and  in 


FAILURES  OF  LIFE  INSURANCE  COMPANIES.     U3 

two  years  succeeded  in  stripping  it  completely  of  all  its 
valuable  assets. 

This  short  sketch  of  a  few  of  the  failed  life  insur- 
ance companies  has  not  been  given  to  indicate  that  there 
are  great  risks  attached  to  the  business.  It  does  show 
that  there  is  considerable  uncertainty  in  organising  a 
new  company,  and  losses  to  the  men  who  have  furnished 
the  capital  have  been  heavy.  The  point  is  that  policy- 
holders have  not  suffered  much.  The  losses  to  them 
through  the  failure  of  companies  in  which  they  were 
insured  amount  to  something  over  thirty-five  million 
dollars.  By  losses  to  policy-holders  is  meant  the  differ- 
ence between  the  actuarial  net  reserves  upon  their 
policies  and  the  sums  which  were  really  paid  to  them 
when  the  companies  were  wound  up.  Thirty-five  mil- 
lions is  not  a  small  amount  taken  by  itself,  but  it  is 
small  when  compared  with  the  savings  which  have 
been  lost  in  other  business  enterprises,  or  when  com- 
pared with  the  total  funds  which  have  been  accumu- 
lated by  life  insurance  companies. 

It  was  said  that  from  a  study  of  the  failures  conclu- 
sions of  value  to  the  investment  manager  and  to  the 
legislator  ought  to  be  reached.  What  are  the  lessons 
taught  by  the  history  of  the  different  companies  ? 

One  of  the  most  significant  facts  gleaned  from  a 
study  of  the  failures  is  that  it  has  been  a  mistake  for 
young  companies  or  companies  with  small  assets  to  in- 


144    FAILURES  OF  LIFE  INSURANCE  COMPANIES. 

vest  in  an  expensive  home  office  building.  It  is  almost 
safe  to  say  that  whenever  a  company  has  made  this  in- 
vestment it  has  suffered  greatly  from  it.  The  Conti- 
nental, the  American  Mutual,  the  St.  Louis  Life  and 
the  Charter  Oak  are  examples  of  companies  on  which 
the  burden  of  a  costly  home  office  rested  heavily.  At  a 
time  when  income  from  investments  was  needed  badly 
they  had  a  large  investment  which  was  producing  a 
negative  income. 

Again,  a  lesson  of  value  to  all  companies  is  that  it 
has  been  unsafe  to  have  too  large  a  proportion  of  the 
funds  invested  in  any  one  class  of  assets.  Even  mort- 
gage loans,  desirable  as  they  usually  have  been  from 
an  income  point  of  view,  should  not  be  sought  exclu- 
sively. Six  of  the  largest  failing  companies  in  New 
York  had  at  their  last  reports  fourteen  million  dollars 
invested  in  real  estate  and  loans  on  real  estate  security. 
Of  this  amount  the  receivers  realised  only  thirty-one  per 
cent.,  showing  a  depreciation  in  the  value  of  real  estate 
seemingly  impossible. 

Perhaps  the  most  important  fact  for  the  investment 
manager  to  note  as  a  cause  of  past  failures  is  that  life 
insurance  funds  cannot  be  used  to  help  out  otherwise 
unsuccessful  enterprises  and  still  have  regard  for  the 
safety  of  the  insurance  interests.  There  has  been  in  the 
past,  and  to  some  extent  at  present,  a  lurking  idea  that 
insurance  accumulations  could  be  used  to  finance  under- 


FAILURES  OF  LIFE  INSURANCE  COMPANIES.     1^5 

takings  of  which  private  capital  might  be  afraid,  and 
that  the  officers  could  loan  the  insurance  money  to 
themselves  or  to  corporations  in  which  they  are  in- 
terested, or  to  their  friends  and  still  not  endanger  the 
solvency  of  the  company.  It  may  be  possible,  but  the 
officers  of  the  Globe,  the  Atlantic,  the  Knickerbocker, 
the  Charter  Oak,  and  nearly  every  other  company 
which  has  failed,  attempted  such  a  use  of  the  funds 
which  they  controlled,  with  the  result  of  bringing 
ruin  to  themselves  and  disappointment  to  the  policy- 
holders. 

The  facts  of  this  chapter  that  should  be  remembered 
in  the  following  discussion  of  legal  regulation  of  the 
investments  and  of  company  management  are,  first, 
that  after  all,  the  great  cause  of  failure  has  been  dis- 
honesty and  fraud ;  and  second,  that  danger  has  not  re- 
sulted particularly  from  any  one  class  of  investments, 
but  that  officers  have  used  all  investment  openings  to 
loot  the  companies  of  their  funds.  Should  legal  regu- 
lations restrict  the  companies  in  their  investments  to 
mortgage  loans  and  a  few  other  securities  ?  The  answer 
is  that  just  as  many  managers  have  used  mortgage 
loans  in  which  to  speculate  with  insurance  funds  as 
have  used  any  other  investment  opening.  The  fault 
has  been  with  the  morals  of  the  management,  and  the 
remedy  should  be  applied  in  that  direction. 


10 


CHAPTEK  VI. 


LEGAL   REGULATION. 


The  first  control  which  the  states  exercised  over  the 
business  of  insurance  was  through  the  provisions  in- 
serted in  the  charters  of  the  companies.  For  a  long 
period  in  our  history  all  corporations,  including  in- 
surance, were  created  by  special  acts  of  the  legislatures 
for  each  individual  company,  and  such  regulations 
could  be  imposed  as  the  legislators  might  see  fit.  The 
insurance  companies  chartered  in  this  way  were  sub- 
ject to  the  laws  regulating  corporations  in  general,  but 
there  were  no  distinctively  insurance  laws  until  1807.1 
In  that  year  the  Massachusetts  Legislature  passed  a 
resolution  requiring  corporations  engaged  in  writing  in- 
surance to  render  an  account  of  their  affairs  to  the  next 
General  Court.  The  same  State  in  1818  enacted  that 
all  insurance  companies  thereafter  incorporated  were 
to  publish  annually  certain  details  of  their  business, 
and  whenever  so  directed  by  the  Legislature  were  to 
make  statements  of  their  affairs  to  that  body  and  sub- 
mit to  oath  concerning  such  statements.     In  1828,  the 

1  John  A.  McCall,  The  Insurance  Times,  1902,  Pages  363-4. 
146 


LEGAL  REGULATION.  147 

New  York  Legislature  enacted  that  all  moneyed  cor- 
porations afterward  created  were  to  make  annual  re- 
ports to  the  State  Comptroller.  Thus,  curiously  enough, 
these  first  attempts  at  regulation  of  the  business  of  in- 
surance by  the  states  nearly  a  hundred  years  ago  were 
directed  to  securing  publicity.  The  movement  thus  be- 
gun is  still  going  on,  with  much  yet  to  be  achieved. 

Massachusetts  passed  unimportant  acts  relating  to 
insurance  in  1836,  1837,  1838,  and  in  1844.  In  1852 
an  important  measure  was  passed.  The  act  of  1818 
had  secured  to  the  Legislature  a  knowledge  of  the 
affairs  of  the  companies  incorporated  in  Massachusetts, 
but  there  were  many  companies  from  other  states  and 
even  from  abroad  doing  business  in  that  Common- 
wealth. Something  ought  to  be  known  of  their  condi- 
tion. To  secure  this  knowledge  the  State  Secretary, 
Treasurer  and  the  Auditor  were  constituted  a  board  of 
insurance  commissioners,  with  authority  to  examine  the 
returns  made  by  foreign  companies  doing  business  in 
Massachusetts  and  to  require  such  other  information  as 
they  might  deem  proper.1  This  board  was  continued 
for  three  years  when  it  was  abolished  and  the  first  state 
department  dealing  exclusively  with  insurance  matters 
was  organised.  The  new  department  was  for  a  while 
presided  over  by  three  commissioners,  but  subsequently 
the  number  was  reduced  to  one. 

1  Chapter  231,  Acts  of  1852. 


148  LEGAL  REGULATION. 

At  the  time  of  the  passage  of  this  act  in  Massachu- 
setts six  other  states  were  requiring  companies  doing 
business  within  their  boundaries  to  make  annual  re- 
ports to  some  state  official,  but  in  all  these  cases  the 
official  was  one  with  other  duties  such  as  the  treasurer 
or  the  state  secretary.  However,  the  Massachusetts 
plan  began  to  be  adopted.  In  1859,  New  York  created 
an  insurance  department.  In  1860,  twenty  of  the 
thirty-three  states  had  enacted  laws  for  the  regulation 
of  insurance  and  in  most  of  these  states  annual  reports 
from  the  companies  were  required,  but  as  yet  only  the 
two  above  mentioned  states  had  insurance  depart- 
ments. The  insurance  business  grew  so  rapidly  during 
the  following  years  and  a  mass  of  laws  regulating  that 
business  accumulated,  so  that  the  necessity  of  having  an 
official  whose  time  should  be  devoted  exclusively  to  in- 
surance matters  became  widely  felt.  Consequently  we 
find  that  in  1871,  thirteen  states  had  an  official  desig- 
nated as  the  insurance  commissioner  or  superintendent 
whose  sole  duty  was  the  administration  of  the  insur- 
ance laws.1  Twenty  other  states  had  the  work  in- 
trusted to  various  officials,  and  only  seven  had  no  of- 
ficial whose  specific  duty  it  was  to  look  after  their  in- 
surance interests.  The  plan  of  having  distinct  insur- 
ance departments  has  proven  most  satisfactory,  and  at 

1  H.  P.  Olcott,  Report  of  the  National  Insurance  Convention, 
1871,  Preface. 


LEGAL  REGULATION.  149 

the  present  time,  twenty-three  states  have  such  depart- 
ments, which  are  coordinate  with  the  various  other  state 
departments,  and  have  but  the  one  branch  of  business 
to  look  after.  In  addition  to  these  twenty-three,  New 
Jersey  has  a  department  of  banking  and  insurance,  and 
Kentucky  has  an  insurance  department  which  is  a 
branch  of  another  department.  Practically  all  the  other 
states  have  insurance  departments,  but  have  no  distinct 
official  at  their  head,  some  other  departmental  head 
being  ex-officio  insurance  commissioner. 

We  have  said  that  these  insurance  departments  have 
been  created  to  administer  the  laws  pertaining  to  the 
business  of  insurance.  These  laws  have  had  for  their 
purpose  the  protection  of  legitimate  insurance  business 
both  from  the  standpoint  of  the  corporation  selling  and 
from  that  of  the  man  purchasing  insurance,  mostly  the 
latter.  To  secure  this  end  laws  have  been  passed  se- 
curing first  publicity  and  then  solvency.  To  secure 
solvency  standard  reserve  laws  and  laws  regulating  the 
investment  of  the  assets  have  been  enacted.  As  this 
thesis  pertains  to  the  investments,  we  will  be  concerned 
with  publicity  only  so  far  as  it  is  related  to  the  assets, 
and  with  laws  insuring  solvency  to  the  same  extent. 

Regarding  the  laws  securing  publicity  of  the  assets 
not  much  need  now  be  said.  A  statement  of  the  as- 
sets and  of  the  securities  of  which  they  consisted  were 
early  required.     Since  the  establishment  of  the  Mass- 


150  LEGAL  REGULATION. 

achusetts  department  in  1855  these  statements  have 
been  published,  showing  the  amounts  invested  in  mort- 
gages, the  amounts  invested  in  real  estate,  the  particular 
bonds  and  stocks  owned,  the  collateral  loans  and  the  se- 
curities on  which  they  have  been  based,  the  cash  de- 
posits, policy  loans,  premium  notes,  accrued  interest, 
etc.,  and  the  insurance  commissioner  has  been  em- 
powered to  investigate  the  companies  to  see  that  these 
statements  of  assets  have  been  correct. 

The  earliest  laws  regulating  the  investment  of  the 
funds  belonging  to  life  insurance  corporations  dealt 
with  the  investment  of  the  capital  stock.  Reserves  upon 
policies  were  still  a  problem  of  the  future.  Neither  the 
managers  of  the  companies  nor  the  legislators  knew  that 
reserves  were  necessary  when  insurance  laws  were  first 
enacted.  The  problem  then  connected  with  the  new 
corporations  was  to  see  that  at  least  a  certain  amount  of 
the  capital  stock  was  paid  up  and  the  cash  safely  in- 
vested. In  this  respect  Massachusetts  again  led  the 
way.  In  the  law  of  1836,  the  Legislature  authorised 
insurance  companies  to  invest  such  portions  of  their 
capital  as  might  be  for  their  interests  in  the  stocks  of 
any  corporation  established  in  Massachusetts  whose 
corporate  property  consisted  entirely  of  real  estate,  or 
the  companies  could  invest  in  the  funded  debt  of  any 
town  or  city  in  the  State.1 

1  Chapter  207,  Laws  of  183& 


LEGAL  REGULATION.  151 

New  York,  in  1849,  enacted  a  law  which  for  the  first 
time  prescribed  what  investments  should  be  made  of  the 
capital  stock  and  fixed  the  amount  of  that  capital  stock.1 
The  law  forbade  any  company  organised  for  the  pur- 
pose of  conducting  life  insurance  on  the  mutual  plan 
from  commencing  business  until  a  cash  capital  of 
$100,000  should  have  been  paid  in  and  actually  invested 
either  in  bonds  of  the  cities  of  New  York,  or  bonds  of 
the  State  of  New  York,  or  of  the  United  States,  or  in 
mortgages  on  cultivated  farms  in  New  York  worth 
double  the  amount  for  which  the  same  was  mortgaged. 
In  this  first  general  incorporation  act  for  insurance 
companies  is  seen  two  tendencies  which  have  played  a 
part  in  much  of  the  laws  regulating  the  investment  of 
insurance  companies,  one  tendency  to  restrict  the  invest- 
ments to  extremely  safe  securities,  and  the  other  tend- 
ency to  keep  the  assets  invested  in  the  state  where  the 
company  may  be  located. 

In  the  following  year  Wisconsin  enacted  a  law  pre- 
scribing yet  narrower  limits  to  the  investment  of  the 
capital  stock.  It  was  either  to  be  invested  in  United 
States  bonds  or  in  mortgage  loans  on  real  estate  in  Wis- 
consin.2 New  Jersey  in  1852  provided  that  life  in- 
surance companies  should  have  a  capital  of  at  least 
$50,000,  half  of  which  must  be  paid  up  and  invested  in 

1  Section  6,  Act  of  April  10,  1849. 
*  Act  of  February  9,  1850. 


152  LEGAL  REGULATION. 

bonds  of  New  Jersey  cities,  or  in  mortgages  on  New 
Jersey  real  estate  before  beginning  business.  Only 
in  one  particular  was  this  law  more  liberal  than  its  pre- 
decessors in  other  states;  it  allowed  bonds  of  half  a 
dozen  leading  states  to  be  purchased.1  Indiana  alone 
of  the  states  which  early  passed  general  incorporation 
acts  allowed  freedom  of  investment.  In  an  act  of 
1852,  that  State  provided  that  companies  should  have  at 
least  $100,000  of  capital  stock,  half  to  be  paid  up  and 
the  larger  part  of  the  half  to  be  invested  in  bonds  of 
solvent  corporations.2  Pennsylvania  in  an  act  of  1856 
left  the  amount  of  capital  stock  unlimited,  and  it  was  to 
be  invested  as  were  the  other  funds  of  the  companies. 

Other  states  did  not  regulate  the  investment  of  the 
capital  stock  for  several  years.  In  the  later  sixties, 
however,  there  came  an  avalanche  of  laws  for  that  pur- 
pose. Kentucky  and  Ohio  in  18 67  passed  laws  making 
legal  investments  for  the  capital  stock,  California,  Iowa 
and  Maryland  in  1868,  Georgia,  Illinois,  Michigan, 
Minnesota,  and  Missouri  in  1869,  and  Kansas  and  Ten- 
nessee in  1870.  The  provisions  of  these  acts  followed 
in  the  main  the  strict  provisions  of  New  York  and  New 
Jersey,  a  new  feature  appearing  in  the  Illinois  statute 
which  gave  the  State  Auditor  the  power  to  decide  upon 
assets  submitted  by  the  companies  as  good  investments 

1  Section  6,  Act  of  March  10,  1852. 

2  Sections  2  and  12,  Acts  of  June  17,  1852. 


LEGAL  REGULATLON.  153 

for  the  capital,1  and  in  Kentucky  where  the  statutes  al- 
lowed the  capital  stock  to  consist  of  the  notes  of  solvent 
persons  or  corporations.  The  Tennessee  Legislature 
openly  attempted  to  create  a  market  for  Tennessee  state 
bonds  by  inserting  in  the  law  a  provision  compelling  the 
companies  to  invest  one-third  of  their  capital  stock  in 
these  bonds.2 

By  the  end  of  1870  eighteen  states  had  laws  regu- 
lating in  some  degree  the  amount  of  the  capital  stock 
of  their  life  insurance  companies,  and  the  securities  in 
which  that  capital  stock  could  be  invested.  During 
the  next  three  decades,  and  especially  during  the  period 
1870-80  similar  laws  were  enacted  by  a  number  of  the 
other  states,  so  that  at  the  present  time,  more  than 
half  the  states  have  regulations  concerning  the  capital 
stock  and  its  investment. 

If  a  study  is  made  of  the  present  laws,  it  is  found 
that  those  states  which  had  narrow  restrictions  upon 
the  investment  of  the  capital  stock  thirty  or  forty  years 
ago  have  seen  fit  to  enlarge  the  field  for  such  invest- 
ments. Those  which  formerly  allowed  wide  latitude  to 
the  companies  have  limited  the  field.  For  instance 
Kentucky  no  longer  allows  stockholders'  personal  notes 
as  an  investment  of  the  capital  stock,  and  has  specific 
investments  which  may  be  made.     Maryland  has  added 

1  Section  1,  Act  of  March  26,  1869. 
a  Section  5,  Act  of  July  11,  1870. 


154:  LEGAL  REGULATION. 

to  her  formerly  narrow  list  of  United  States,  Maryland 
and  Baltimore  bonds,  the  bonds  of  any  state,  or  of  any 
city,  county  or  corporation  paying  interest,  and  ground 
rents  and  mortgages  on  real  estate.  Pennsylvania  no 
longer  depends  upon  charter  regulations,  but  now  de- 
mands $300,000  of  capital  invested  in  Pennsylvania 
mortgages,  United  States,  Pennsylvania,  county  and 
city  bonds,  and  ground  rents.  Tennessee  has  given  up 
her  narrow  limitations  to  Tennessee  bonds,1  and  allows 
the  insurance  commissioner  to  decide  when  capital  stock 
investments  are  good.  The  result  is  that  the  various 
laws  are  much  more  uniform  than  formerly,  a  tendency 
which  will  be  found  true  in  all  branches  of  insurance 
legislation. 

Summing  up  shortly  the  present  laws  regulating  the 
capital  stock  of  insurance  companies,  most  of  the  states 
require  a  minimum  capital  of  $100,000.  All  the  states 
which  have  regulations  allow  this  capital  to  be  invested 
in  United  States  bonds,  and  in  the  bonds  of  the  states 
where  the  company  is  located.  In  general  the  capital 
may  be  invested  in  real  estate  loans,  the  value  of  the 
land  mortgaged  to  be  double  the  amount  of  the  loan, 
and  the  real  estate  to  be  located  in  the  home  state  of  the 
company.  City  and  town  bonds  can  be  purchased  and 
collateral  loans  made  upon  the  above  securities. 

These  laws  regulating  the  investment  of  the  capital 

1  Section  13,  Insurance  Laws  of  1903. 


LEGAL  REGULATION.  155 

stock  are  strict,  and  they  have  exercised  an  important 
influence  upon  the  life  insurance  business  in  this 
country.  As  a  guarantee  of  good  intentions  and  to 
provide  a  fund  to  tide  over  the  first  years,  a  paid-up 
capital  safely  invested  is  a  requirement  of  nearly  every 
state  for  a  new  company. 

However  important  the  regulations  of  the  capital 
stock  and  its  investment  may  be  to  the  young  company, 
they  are  of  little  significance  compared  with  the  statutes 
governing  the  investment  of  the  other  assets  of  the 
companies.  This  is  true  because  the  other  assets  are 
so  much  larger  than  the  capital  stock.  In  1904  the 
combined  capital  of  the  companies  doing  business  in 
Wisconsin  was  eleven  and  one-quarter  million  dollars. 
The  assets  of  the  same  companies  amounted  to  two  bil- 
lion, three  hundred  million  dollars.  When  regulations 
first  were  made,  it  was  not  known  that  reserves  were 
necessary.  Gradually  the  companies,  getting  on  a  more 
scientific  basis,  began  to  accumulate  funds,  then  the 
states  required  a  legal  standard  reserve,  and  to  secure 
its  safe  investment  enacted  laws  regulating  the  com- 
panies' action  in  this  respect. 

In  some  cases  we  even  find  laws  being  passed  regulat- 
ing the  investments  of  the  accumulated  funds  before 
reserves  were  required  by  the  states.  Particularly  is 
this  true  regarding  the  amount  of  real  estate  which  a 
life  insurance  company  might  possess.     Massachusetts, 


156  LEGAL  REGULATION. 

as  early  as  1836,  limited  the  real  estate  investments  of 
some  fire  insurance  companies,  and  in  1849  New  York 
laid  down  certain  requirements  about  holding  real  es- 
tate by  her  life  companies  which  have  formed  the  basis 
of  many  subsequent  acts.  This  law  limited  the  amount 
of  real  estate  which  a  company  might  hold  to : 

1.  That  which  was  necessary  for  the  convenient 
transaction  of  its  business. 

2.  Such  as  had  been  mortgaged  to  the  company  in 
good  faith  by  way  of  security  for  loans  previously  con- 
tracted or  for  moneys  due. 

3.  Such  as  should  be  conveyed  to  the  company  in 
satisfaction  of  debts  previously  contracted  in  the 
course  of  its  dealings. 

4.  Such  as  should  be  purchased  at  sales  upon  judg- 
ments, decrees,  or  mortgages  obtained  for  such  debts. 

All  real  estate  obtained  from  settlement  of  debts  due 
the  company  had  to  be  sold  within  Hve  years.  The  pur- 
pose of  the  act  was  clearly  to  restrict  narrowly  the  own- 
ership of  real  property  by  life  insurance  corporations. 
Wisconsin  in  1850  1  and  New  Jersey2  in  1852  enacted 
laws  similar  to  that  of  New  York.  Indiana  in  the 
latter  year  enacted  that  its  companies  could  hold  real 
estate  for  business  purposes  equal  in  value  to  $30,000. 
All  that  obtained  through  foreclosure  of  loans  or  taken 

1  Section  11,  Act  of  June  17,  1852. 
9  Section  9,  Act  of  February  9,  1850. 


LEGAL  REGULATION.  157 

for  debts  was  to  be  offered  at  public  sale  and  sold  to  the 
highest  bidder  within  a  specified  period.1  Pennsyl- 
vania in  1856,  Ohio  in  1867,  Iowa  and  California  in 
1868,  Michigan  in  1869,  Kentucky  in  1870,  and  Kansas 
in  1871  all  prohibited  the  holding  of  real  estate  by  their 
life  companies,  except  under  the  four  conditions  given 
above  for  New  York. 

This  peculiar  policy  of  prohibiting  the  ownership 
of  much  real  estate  by  life  insurance  corporations  in 
this  country  was  undoubtedly  an  inheritance  from  the 
English  law  of  mortmain.  The  laws  restricting  this 
particular  class  of  business  corporations  were  an  ex- 
pression of  the  popular  belief  of  the  danger  of  allow- 
ing unlimited  ownership  in  land  to  an  organisation 
which  did  not  die. 

To-day  the  feeling  of  antipathy  toward  corporations 
owning  real  estate  has  died  out  largely,  but  the  policy 
of  prohibiting  insurance  investments  in  that  particular 
asset  has  been  maintained.  This  is  due  to  the  bad  ex- 
perience which  companies  have  had  with  real  estate 
during  depressed  business  conditions.  At  the  present 
time  twenty  states  have  laws  forbidding  the  companies 
from  holding  any  more  real  estate  than  that  allowed  by 
the  New  York  statute  of  1849.  The  real  estate  ac- 
quired through  settlement  of  debts  is  in  general  to  be 
sold  within  five  years  after  so  taken.     The  exceptions 

1  Section  11,  Act  of  March  10,  1852. 


158         .  LEGAL  REGULATION. 

to  this  rule  are  the  States  of  Washington  and  South 
Dakota,  which  fix  no  limit  on  the  time  the  real  estate 
may  be  held;  and  in  a  number  of  states  the  five  year 
period  may  be  extended  if  the  company  can  prove  to 
the  insurance  commissioner  of  its  state  that  it  would  be 
injured  by  such  a  sale.  Utah  has  a  statute  definitely 
allowing  investment  in  realty  to  any  extent,  and  Ala- 
bama likewise  has  a  liberal  law.  Connecticut  allows 
her  companies  to  improve  real  estate  which  they  have 
obtained.1  Massachusetts  adheres  to  the  system  of  al- 
lowing a  certain  amount  to  be  invested  in  real  estate  for 
business  purposes,  the  value  being  fixed  for  each  com- 
pany by  special  legislation.  Twelve  states  make  no 
provision  whatever  concerning  what  real  estate  may  be 
held. 

Georgia  and  New  York  deserve  particular  mention. 
Georgia  not  only  provides  for  its  companies  to  hold 
realty  for  home  office  purposes,  but  they  may  make  a 
permanent  investment  in  any  city  where  they  have 
agencies.2  New  York  has  enlarged  the  powers  of  its 
companies  since  1849.  In  1876,  the  privilege  of  own- 
ing real  estate  for  business  purposes  other  than  the 


1  The  Connecticut  General  Assembly  in  1887  passed  a  special 
resolution  allowing  the  Connecticut  Mutual  to  invest  a  sum  not 
exceeding  five  per  centum  of  its  assets  in  productive  real  estate 
outside  of  Connecticut.  This  law  is  worthy  of  notice  as  being 
one  of  the  few  providing  for  a  direct  investment  in  real  estate. 

2  Section  18,  Number  301,  Insurance  Laws. 


LEGAL  REGULATION.  159 

home  office  was  granted.1  In  1883,  the  further  right 
was  allowed  of  holding  real  estate  in  foreign  countries 
if  it  was  needed  for  the  transaction  of  business.2  Land 
acquired  in  settlement  of  debts  was  still  to  be  sold  in 
five  years,  but  in  1896  a  law  was  enacted  providing 
that  when  a  company  sold  real  estate  the  supreme  court 
could  authorise  it  to  purchase  more  upon  satisfactory 
proof  that  the  property  purchased  did  not  exceed  the 
value  of  the  property  sold  by  the  company  during  the 
last  three  years  preceding  the  application  of  the  com- 
pany to  make  new  purchases.3  As  a  result  of  the  ex- 
posures made  by  the  Armstrong  committee  this  privi- 
lege, granted  in  1896,  has  been  taken  away  from  the 
New  York  companies,4  and  the  law  concerning  the  own- 
ership of  realty  in  that  State  now  corresponds  to  the 
regulations  found  in  other  states. 

It  is  thus  seen  that  the  laws  regulating  the  real  estate 
investments  are  on  the  whole  strict.  Whether  without 
them  the  companies  would  have  purchased  real  estate 
in  greater  quantities  or  held  on  to  that  which  came  in- 
directly cannot  be  known.  The  larger  companies  in 
New  York  took  advantage  of  the  privileges  granted 
them,  but  doubtless  the  poor  return  which  real  estate 


1  Chapter  357,  Laws  of  1876. 

2  Chapter  36  i,  Laws  of  1883. 
•  Chapter  35,  Laws  of  1896. 

«  Chapter  228,  Acts  of  1906. 


160  LEGAL  REGULATION. 

has  made  would  have  prevented  its  forming  a  much 
larger  proportion  of  the  assets  than  it  already  does. 

Legal  regulation  of  the  investments  has  not  stopped 
with  certain  prohibitions  concerning  the  ownership  of 
real  estate.  It  has  gone  further  and  has  decided  to 
some  extent  what  should  be  the  character  of  the  assets 
owned  by  life  insurance  companies.  The  first  regula- 
tions of  this  sort  were  contained  in  the  charters  of 
various  companies.  Massachusetts  in  granting  a  char- 
ter to  the  Berkshire  in  1841,  provided  that  its  funds 
should  be  invested  in  such  securities  as  were  permitted 
to  the  savings  banks.1  In  the  charter  of  the  Mutual 
Life  of  New  York  in  1842  was  the  provision  of  power 
to  the  trustees  to  invest  not  exceeding  one-half  of  the 
premiums  received  in  bonds  of  the  United  States,  or  of 
New  York,  or  of  cities  in  New  York.2  The  Connecti- 
cut Mutual  charter  in  1846  allowed  that  company  to 
invest  in  mortgage  loans,  and  in  collateral  loans  on 
state  bonds  and  bank  stock.3  Pennsylvania  in  1847, 
gave  the  Penn  Mutual  the  right  to  invest  one-fourth 
of  its  funds  in  mortgages,  ground  rents,  Federal  and 
Pennsylvania  bonds,  or  in  other  good  securities.4  The 
National  Life,  in  its  charter  of  1848,  was  required  to 
invest  in  Federal  or  state  bonds  or  in  mortgages  within 

1  Sectior  It,  Charter  of  1842. 

2  Section  5,  Charter  of  1841. 
8  Section  7,  Charter  of  1846. 

*  Sections  11,  and  12,  Charter  of  1847. 


LEGAL  REGULATION.  161 

the  State  of  Vermont.1  The  Phoenix  in  1851,  received 
somewhat  wider  powers,  being  allowed  to  invest  in 
Federal  or  state  bonds,  in  mortgages,  or  in  bonds  of 
Connecticut  cities,  and  one-fourth  of  the  assets  could 
be  loaned  upon  endorsed  promissory  notes.2 

These  early  charter  provisions  show  one  distinct  tend- 
ency, namely,  to  confine  the  investments  to  the  home 
states.  There  was  one  good  and  one  bad  motive  for  this 
action.  Home  securities  were  safer,  for  the  risk  would 
be  better  known  than  of  those  investments  further  away. 
This  accounts  for  the  good  motive.  The  other  motive 
which  will  not  stand  inspection  so  well  was  the  desire 
to  keep  the  funds  within  the  state  where  the  company 
was  located.  We  saw  this  desire  playing  a  part  in  the 
regulations  of  the  capital  stock  investments,  it  shows  it- 
self here  in  charter  provisions,  and  in  the  general  laws 
we  will  see  it  frequently  cropping  out. 

The  first  general  statute  regulating  the  investment 
of  life  insurance  assets  was  enacted  by  New  Jersey  in 
1852.  This  law  declared  the  legal  investments  for  New 
Jersey  companies  should  be  mortgages  on  real  estate  in 
that  Commonwealth,  bonds  of  the  United  States,  and 
of  a  half  dozen  states.3  Indiana  in  the  same  year  passed 
a  law4  regulating  investments  but  its  terms  were  so 

1  Section  6,  Charter  of  1848. 

2  Section  13,  Charter  of  1851. 

8  Section  46,  Act  of  June  17,  1852. 
*  Section  10,  Act  of  March  10,  1852. 
II 


<$ 


162  LEGAL  REGULATION. 

liberal  that  the  companies  were  not  restricted.  The 
New  York  Legislature  was  the  next  one  impressed  with 
the  need  of  a  general  act  prescribing  the  legal  invest- 
ments which  a  company  could  make.  In  1857,  such  a 
law  was  enacted  permitting  investments  in  United  States 
bonds,  in  bonds  of  any  state,  or  in  the  bonds  or  stocks 
of  any  institution  incorporated  in  New  York.  Col- 
lateral loans  could  be  made  upon  the  above  securities.1 

Wisconsin  in  granting  a  charter  to  the  Northwestern 
in  1857,  provided  that  at  least  half  the  funds  should  be 
invested  in  mortgages.  In  addition  to  the  common  re- 
striction to  certain  other  bonds,  a  new  power  was  granted 
this  company.  It  could  make  loans  to  its  policy-hold- 
ers from  time  to  time.2 

The  restrictions  upon  the  powers  of  investing  the 
general  assets  did  not  become  general  as  rapidly  as  did 
the  restrictions  upon  capital  stock  investment  and  the 
holding  of  real  estate.  By  the  end  of  1870  only  nine 
states  had  seen  fit  to  place  any  restrictions  upon  their 
companies  in  the  general  field  of  investments.  These 
nine  states  were  New  Jersey,  New  York,  California, 

1  It  is  difficult  to  determine  whether  this  is  the  first  act  regula- 
ting the  investment  of  the  accumulations  of  New  York  com- 
panies. Legal  reserves  were  not  yet  required  and  the  language 
of  the  acts  is  ambiguous.  The  law  of  1849  regulated  capital  and 
"funds."  The  law  of  1857  regulated  "surplus  accumulations" 
above  capital  stock,  but  provided  that  if  any  permanent  fund  is 
established  by  a  company  it  shall  be  invested  as  required  in  the 
law  of  1849. 

2  Section  11,  Charter  of  1857,  Section  10,  Amendment  1858. 


LEGAL  REGULATION.  163 

Illinois,  Iowa,  Kansas,  Kentucky,  Ohio,  and  Wisconsin. 
At  this  time  all  of  these  states  restricted  the  mortgage 
loans  of  their  companies  to  real  estate  at  home.  Six  re- 
stricted the  purchase  of  state  bonds  to  those  of  the  state 
where  the  company  was  located,  and  only  the  bonds  of 
cities  within  that  state  could  be  purchased.  California 
and  Iowa  in  addition  to  New  York  allowed  investments 
in  the  securities  of  corporations  chartered  by  them,  and 
Kentucky  allowed  securities  of  railroads  to  be  pur- 
chased, while  Illinois  permitted  the  stock  of  banks  in 
that  State.  All  of  the  nine  made  United  States  bonds 
legal  investments,  and  permitted  collateral  loans  on  the 
securities  which  the  companies  could  purchase.  Out- 
side of  the  evident  purpose  to  keep  the  assets  at  home 
the  noticeable  feature  is  the  restriction  to  public  se- 
curities. Illinois  and  Wisconsin  alone  had  a  policy 
which  was  justifiable.  These  states  provided  that  when- 
ever companies  chartered  by  them  went  into  other 
states  to  transact  a  life  insurance  business  that  they 
could  invest  in  all  the  securities  of  that  state  which 
they  could  at  home.  New  York  had  a  provision  allow- 
ing her  companies  to  purchase  the  bonds  of  those  states 
which  required  a  deposit  of  their  bonds  as  a  pre-requisite 
to  doing  business  within  their  boundaries,1  but  the 
strong  desire  of  her  legislators  to  keep  assets  at  home 
was  visible  in  the  new  charter  of  the  Mutual  Life  in 
1  Section  1,  Act  of  April  12,  1860. 


16-4  LEGAL  REGULATION. 

1866.  One-half  of  its  assets  could  be  invested  in 
United  States,  New  York  state,  and  cities  of  New 
York  bonds,  but  at  least  one-half  had  to  be  invested 
in  mortgage  loans  on  real  estate  in  New  York. 

But  even  New  York  had  been  forced  to  make  a 
slight  concession  before  1870.  The  limitation  of  mort- 
gage loans  to  real  estate  in  New  York  was  creating  much 
friction.  The  companies  in  that  State  were  objecting 
to  it  strenuously,  because  it  forced  them  to  make  loans 
at  a  lower  rate  of  interest  than  was  being  obtained 
by  other  Eastern  companies  untrammeled  by  state  laws. 
People  in  the  middle  West  were  also  objecting  just  as 
vigorously,  for  they  felt  that  New  York  was  unjustly 
depriving  them  of  a  financial  advantage  which  was 
rightfully  theirs  to  enjoy.  The  funds  of  the  companies 
were  being  collected  in  large  part  from  policy-holders 
in  those  states,  the  people  in  the  West  needed  the 
capital,  and  were  willing  to  pay  well  for  its  use,  in 
a  sense  it  belonged  to  them,  yet  the  only  security  which 
they  had  to  offer  was  real  estate,  and  this  New  York 
compelled  her  companies  to  refuse.  The  companies 
exerted  pressure  upon  the  Legislature,  the  agrarian  re- 
presentatives became  convinced  that  their  interests 
would  not  suffer,  and  the  privilege  was  granted  of  loan- 
ing on  realty  outside  of  New  York,  provided  the  prop- 
erty was  located  within  fifty  miles  of  New  York  city.1 
1  Section  1,  Act  of  April  24,  1868. 


LEGAL  REGULATION.  165 

The  developments  in  the  insurance  world  during 
the  seventies  led  to  much  more  legislation  concerning 
the  investments.  The  failure  of  half  the  companies 
in  a  decade,  with  the  consequent  disappointment  and 
loss  to  the  policy-holders,  gave  an  impetus  to  state  regu- 
lation which  had  not  been  felt  before.  States  like  Mis- 
souri which  witnessed  failures  of  practically  all  their 
once  promising  companies  felt  that  legislation  was  nec- 
essary despite  the  fact  that  in  those  states  which  did  have 
strict  laws  and  insurance  departments  many  companies 
had  become  insolvent.  Ever  since,  there  has  been  a 
gradual  increase  of  regulation  until  at  the  present  time 
there  are  twenty-two  states  which  have  imposed  more 
or  less  stringent  regulations  upon  the  investments  of 
their  companies.  This  number  of  states  is  hardly  a 
true  criterion  of  the  extent  of  the  regulation  of  the 
investments,  for  it  is  precisely  those  states  having  legal 
enactments  which  have  the  largest  insurance  interests. 
Only  one  exception  need  be  made  to  this  statement. 
Massachusetts  with  a  number  of  strong  and  well-known 
companies  has  removed  her  restrictions  upon  their  in- 
vestments, even  in  1888  those  provided  in  the  charters 
of  the  mutual  life  companies. 

Without  going  into  detail  as  to  the  various  changes 
which  states  have  made  in  the  laws  as  they  were  in 
1870,  we  find  that  at  present  all  the  states  having  legal 
regulations  allow  their  companies  to  invest  in  United 


166  LEGAL  REGULATION. 

States  bonds,  just  as  they  always  have.  In  the  case  of 
state  bonds  a  very  noticeable  expansion  in  the  field  is 
shown.  Whereas  in  1870  most  of  the  laws  limited  the 
purchase  of  these  bonds  to  their  own  particular  state, 
at  the  present  time  eighteen  of  the  twenty-two  states 
allow  investments  in  the  bonds  of  any  state.  The  same 
broadening  of  the  field  is  true  of  investments  in  city 
and  county  bonds.  Thirty-five  years  ago  no  state  which 
had  attempted  to  control  the  investments  by  general 
laws  allowed  the  companies  to  go  beyond  their  own 
boundaries  for  such  bonds.  Now,  fourteen  states  allow 
this  privilege.  Not  more  than  four  states  at  present, 
Georgia,  Nebraska,  Pennsylvania  and  Texas,  confine 
mortgage  loans  to  the  home  state  of  the  company. 
Even  the  New  York  Legislature  at  last  gave  up  the 
attempt  to  keep  the  insurance  funds  within  that  State. 
The  fifty-mile  limit  around  New  York  city  was  fin- 
ally extended  in  1875  to  all  the  states  adjacent  to 
New  York,1  but  it  was  several  years  later  before  the 
companies  were  given  the  privilege  of  loaning  freely 
on  real  estate  wherever  located. 

In  1870  only  four  states  allowed  investments  in  cor- 
poration securities.  At  the  present  time  a  number  of 
the  states  have  exceedingly  liberal  provisions  regarding 
these  investments.     California,  Colorado  and  Utah  per- 

1  Section  2,  Chapter  423,  Acts  of  1875. 


LEGAL  REGULATION.  167 

mit  their  companies  to  invest  in  the  bonds  or  stocks 
of  any  solvent  dividend-paying  institution  other  than 
mining  corporations.  Connecticut,  which  formerly  de- 
pended on  charter  regulations,  now  has  a  general  law 
which  allows  investments  in  all  corporation  securities 
except  those  of  mining  and  manufacturing  companies.1 
One  important  provision  is  added,  dividends  must  have 
been  paid  on  such  securities  for  at  least  three  years 
preceding  the  purchase.  New  Jersey  only  excepts  the 
stock  of  mining  and  manufacturing  corporations  and 
stocks  commonly  known  as  industrials.2  Pennsylvania 
allows  all  railroad  securities  and  those  of  other  corpora- 
tions incorporated  in  Pennsylvania.3  Illinois  provides 
that  all  corporation  securities  be  purchased  subject  to 
the  insurance  superintendent's  approval.4  Wisconsin 
has  a  law  which  is  regarded  in  many  quarters  as  pos- 
sessing exceptional  merit.  It  allows  no  corporation 
securities  except  bonds  of  railroads  and  street  rail- 
ways.5 

Nine  states  have  made  definite  provisions  for  in- 
vestments in  policy  loans  up  to  a  certain  fixed  proportion 
of  the  reserve  upon  the  policies.  A  majority  allow  the 
companies  to  make  collateral  loans  under  certain  re- 

1  Section  28,  Chapter  63,  Acts  of  1879. 

2  Section  16,  Insurance  Laws  of  1902. 

8  Sections  18  and  19,  Act  of  May  1, 1876. 

4  Sections  11  and  12,  Chapter  189,  Insurance  Laws. 

8  Section  1,  Chapter  22,  Insurance  Laws  1901. 


168  LEGAL  REGULATION. 

strictions  upon  the  securities  which  they  may  purchase 
outright.  Usually  it  is  provided  that  at  all  times  dur- 
ing the  period  of  such  a  loan  the  market  value  of  the 
collateral  must  be  at  least  twenty  per  cent,  in  excess 
of  the  loan. 

Some  states,  following  in  the  main  the  above  restric- 
tions, have  others  peculiar  to  themselves.  Iowa  has 
enacted  that  not  more  than  five  per  cent,  of  the  assets 
shall  be  invested  in  national  bank  stocks.1  Kentucky 
prohibits  her  companies  from  owning  more  than  one- 
third  of  the  capital  stock  of  any  bank  or  corporation. 
Nor  shall  the  investment  in  railroad  securities  exceed 
one-half  of  the  assets,  and  the  mortgage  loans  on  real 
estate  are  not  to  exceed  three-fourths  of  the  accumulated 
funds  of  any  company.  This  law  has  the  distinct  pur- 
pose to  so  scatter  the  investments  that  the  companies 
will  not  be  seriously  affected  by  the  decrease  in  value 
of  one  class  of  securities  or  of  the  securities  of  one 
corporation. 

Ohio  permits  no  corporation  securities  of  any  kind  to 
be  purchased  by  her  companies.  State,  city  and  county 
bonds  can  be  purchased  only  when  their  market  value 
is  equal  to  eighty  per  cent,  of  the  par  value.2  Ne- 
braska has  the  same  provisions  and  further  does  not 
even   allow  collateral  loans.      South   Dakota  has   the 

1  Section  1806,  Chapter  8,  Insurance  Laws. 

2  Section  3598,  Laws  of  the  General  Assembly,  1902. 


LEGAL  REGULATION.  169 

strictest  laws  of  any  state.1  Only  Federal  and  state 
bonds  may  be  purchased,  and  these  must  be  at  least 
at  par  in  the  market.  In  addition  to  buying  such  bonds 
mortgage  loans  may  be  made. 

Notwithstanding  the  strictness  of  the  laws  in  the  three 
last-mentioned  states,  the  tendency  on  the  whole  has 
been  to  allow  the  companies  a  much  wider  field  of  in- 
vestment. Especially  are  state  boundaries  now  over- 
stepped. Even  the  three  with  the  strictest  laws  do  not 
attempt  to  keep  the  assets  invested  at  home.  No  move- 
ment in  the  field  of  insurance  legislation  is  more  strik- 
ing than  this  one  away  from  the  narrow,  unjust  policy 
of  restricting  insurance  investments  to  a  certain  field, 
not  primarily  for  the  sake  of  safety  to  the  companies, 
but  for  the  purpose  of  securing  a  better  loan  market 
for  the  citizens  of  that  state. 

This  policy  of  restriction  has  not  been  entirely  aban- 
doned, neither  has  the  opposite  one  which  keeps  appear- 
ing in  different  sections.  If  the  states  with  companies 
were  anxious  to  keep  the  assets  at  home,  the  states  with-  /£. 
out  companies,  but  paying  premiums,  were  anxious  to 
secure  some  advantage  from  the  accumulated  savings. 
Such  a  desire  was  once  made  manifest  in  law.  Wis- 
consin in  1865,  before  she  had  a  large  company  of  her 
own,  enacted  that  all  insurance  companies  doing  business 
in  Wisconsin  should  deposit  a  certain  percentage  of  the 
1  Section  703,  Article  17,  Insurance  Laws, 


170  LEGAL  REGULATION. 

premiums  collected  in  Wisconsin  with  the  State  Treas- 
urer in  Wisconsin  bonds.1  The  law  overshot  the  mark. 
Not  content  with  trying  to  keep  the  capital  at  home,  the 
legislators  tried  at  the  same  time  to  make  a  market 
for  Wisconsin  state  bonds.  The  last  feature  was 
a  most  serious  objection  to  a  successful  operation 
of  the  law,  and  the  whole  law  was  repealed  in  less  than 
a  year.2  Since  then  such  a  law  has  never  been  enacted, 
but  the  idea  has  been  constantly  in  the  minds  of  legis- 
lators. We  will  see  it  more  fully  in  a  study  of  insur- 
ance taxation,  working  indirectly,  but  it  has  been  ex- 
pressed openly  in  projected  laws.  In  Kansas  during 
the  session  of  1880-1  a  bill  was  offered  to  compel  re- 
serves to  be  invested  in  Kansas.  Governor  Culberson 
of  Texas  in  his  message  to  the  Legislature  in  1896 
strongly  urged  such  a  measure  for  that  State,  and  as 
late  as  1903,  a  bill  was  introduced  in  the  Illinois  Legis- 
lature requiring  the  life  companies  to  invest  ninety  per 
cent,  of  reserves  on  Illinois  business  in  Illinois  se- 
curities.3 The  South  in  its  present  need  of  capital 
is  now  urging  the  justice  of  this  plan. 

Another  way  in  which  states  have  regulated  to  a 
very  slight  degree  the  investment  of  the  assets  has 
been   through   the   deposit   laws.      Arkansas   in   IS 64 


1  Act  of  March  29, 1866. 

2  Act  of  April  6,  1865. 

8  The  Insurance  Spectator,  Volume  70,  Page  157. 


LEGAL  REGULATION.  171 

wanted  to  borrow  $150,000.  In  the  act  authorizing  the 
loan  it  was  provided  that  all  life  insurance  companies 
should  make  a  deposit  of  $20,000  in  Arkansas  bonds 
as  a  pre-requisite  for  doing  business  in  that  State. x  The 
plan  thus  inaugurated  was  followed  somewhat  exten- 
sively for  a  few  years,  but  it  has  fallen  into  general 
disfavour.  Virginia  alone  still  requires  a  deposit  from 
all  companies.  It  is  now  usual  to  require  a  deposit  in 
a  single  state,  that  being  the  one  in  which  the  company 
is  organised. 

When  New  York  passed  the  general  incorporation  act 
for  insurance  companies  in  1849,  it  prohibited  the  com- 
panies organised  under  the  act  from  directly  or  indi- 
rectly dealing  in,  trading,  buying,  or  selling  any  com- 
modities. A  half  dozen  states  in  the  next  few  years 
enacted  similar  laws.  Wisconsin  in  1870  prohibited  life 
companies  from  doing  a  fire  insurance  business  or  en- 
gaging in  banking.2  The  prohibition  of  life  insurance 
companies  from  doing  other  kinds  of  business  is  now 
general.  The  result  is  that  there  are  no  life  insurance 
companies  transacting  fire  insurance,  a  combination  not 
infrequent  in  England. 

A  class  of  laws  affecting  the  investments  of  those 
companies  doing  a  foreign  business  remains  to  be  con- 
sidered.    One  of  the  most  common  of  the  requirements 

*  Section  1,  Act  of  May  31,  1864. 
2  Section  18,  Act  of  March  14,  1870. 


172  LEGAL  REGULATION. 

of  foreign  countries  is  that  outside  companies  must 
invest  the  reserves  upon  the  policies  written  in  that 
country  in  the  securities  of  that  country.  A  striking 
example  of  these  laws  is  afforded  by  the  Argentine  Ke- 
public.  By  a  law  passed  in  1898  the  Argentine  govern- 
ment was  authorised  to  issue  a  loan  of  seven  million 
pesos  in  five  per  cent,  bonds.  Contributions  to  the 
loan  were  compulsory  by  foreign  companies  to  guaran- 
tee contracts  entered  into  by  them  in  that  country.1 
Prussia  required  that  one-half  of  the  yearly  premiums 
of  Prussian  policies,  besides  the  interest  thereon,  must 
be  invested  in  Prussian  consols.  Besides,  American 
companies  were  required  to  dispose  of  their  stock  and 
loans  on  stocks  if  they  continued  to  do  business  in 
Prussia.2 

This  concludes  the  study  of  the  laws  regulating  the 
investments  of  our  life  insurance  companies.  Before 
taking  up  a  discussion  of  those  laws  it  will  be  well 
to  take  a  hasty  survey  of  the  regulations  imposed 
by  other  governments  upon  insurance  companies. 

Canada  has  followed  the  lead  of  the  United  States 
in  the  matter  of  insurance  legislation.  Certain  broad 
classes  of  assets  have  been  permitted  as  legal  investments 
to  the  companies,  not  always  the  same  as  those  selected  by 


1  Charles  Le  Jeune.    Transactions  of  the  Second  International 
Congress  of  Actuaries,  1898,  Page  35. 

2  The  Insurance  Monitor,  1900,  Page  35. 


LEGAL  REGULATION.  173 

the  states,  but  still  along  the  same  general  lines.  It  is 
in  England  where  we  find  the  greatest  variation  in  the 
attitude  of  the  government.  For  years  that  country 
allowed  her  companies  almost  absolute  freedom  in  all 
respects,  and  then  because  of  grave  evils  which  arose 
was  forced  to  exercise  some  supervision,  and  a  law  for 
this  purpose  was  passed  in  1872. 1  However,  in  that 
law  no  restrictions  were  placed  upon  the  investment 
powers  of  the  companies,  and  the  only  limitations  to- 
day are  those  contained  in  the  charters  of  the  com- 
panies. Taking  as  a  basis  a  report 2  made  in  1891  re- 
garding the  privileges  of  some  seventy-two  companies 
in  England,  it  is  found  that  thirty-three  have  unlimited 
powers  of  investment.  Of  the  thirty-nine  having  limited 
powers,  thirty-one  have  power  to  invest  in  ground  rents 
and  income  arising  from  land ;  seventeen  are  allowed  to 
invest  in  real  estate,  usually  in  such  as  is  required  for 
business  purposes ;  twenty-six  can  invest  in  foreign  gov- 
ernment securities,  in  most  cases  of  any  government; 
twenty-four  can  invest  in  English  or  Colonial  municipal 
bonds;  thirty-five  out  of  thirty-nine  have  considerable 
power  to  purchase  the  shares  and  other  securities  of 
corporations,  the  usual  requirement  being  that  the 
shares  must  be  dividend-producing  and  with  limited  lia- 


1  33  and  34  Victoria,  Chapter  61. 

2  Mr.  A.  G.  Mackenzie,  Journal  of  the  Institute  of  Actuaries, 
Volume  29,  Pages  218  ff. 


174  LEGAL  REGULATION. 

bility;  and  nineteen  can  loan  on  personal  security. 
These  investment  powers  are  extremely  liberal.  Not 
only  can  the  companies  go  to  the  colonies  to  find  paying 
investments,  but  even  to  countries  with  no  political  con- 
nection with  England,  and  nearly  one-half  of  the  com- 
panies are  entirely  unrestricted. 

Australia  has  followed  the  English  policy.  The  com- 
panies are  permitted  to  invest  in  whatever  they  choose 
except  in  land.  Land  speculation  is  prohibited.1  The 
Government  Insurance  Department  of  New  Zealand  is 
confined  in  its  investments  to  government  bonds,  loans 
to  municipalities,  policy  loans  and  mortgages  on  real 
estate.2 

Germany  finally  decided  in  favour  of  imperial  control 
of  the  insurance  business,  and  while  the  restrictions 
placed  upon  the  investments  by  the  Empire  are  not 
as  strict  as  were  those  of  Prussia,  they  are  probably 
the  most  exacting  now  to  be  found.  The  funds  are  to 
be  invested  in  the  same  securities  as  are  prescribed 
by  law  for  the  investment  of  orphans'  money,  or  in 
mortgages  on  real  estate,  in  policy  loans,  or  in  the 
bonds  of  local  public  bodies,  or  in  bank  stocks.3 

For  years  the  French  laws  compelled  companies  in 
that  country  to  invest  in  government  funds  all  sums 

1  Transactions  of  the  Faculty  of  Actuaries,  Volume  11,  Part 
V,  Page  104. 

2  The  Insurance  Times,  November,  1887. 

8  The  Insurance  Spectator,  1901,  Page  62. 


LEGAL  REGULATION.  175 

received  from  the  assured,  and  that  within  five  days 
after  their  receipt.1  This  limitation  has  been  removed 
until  at  present  the  insurance  companies  may  invest 
in  whatever  the  "  Council  of  State  "  deems  are  safe 
securities.2 

It  is  not  necessary  to  point  out  why  some  supervision 
over  the  business  of  life  insurance  is  essential.  Abuses 
in  banking  have  forced  most  governments,  certainly 
those  of  the  various  commonwealths  in  the  United 
States,  to  exercise  control  over  that  business.  Yet  in 
banking  the  public  is  far  more  able  to  protect  itself  than 
it  is  in  the  business  of  life  insurance.  Even  men  who 
are  successful  in  other  lines  of  business  know  few  of 
the  underlying  principles  of  insurance.  Of  itself  the 
public  is  helpless  in  regard  to  the  equities  of  the  busi- 
ness and  in  respect  to  a  quick  test  of  solvency  has  no 
power  whatever.  The  liabilities  of  an  insurance  com- 
pany are  all  deferred  and  a  policy-holder  cannot  with- 
draw when  he  is  dissatisfied.  In  most  businesses,  a 
wrong  step  shows  immediate  effect  and  compels  an  im- 
mediate correction,  but  in  life  insurance  a  fatal  error 
may  be  made  and  yet  no  signs  of  it  appear  for  years 
so  far  as  ability  to  pay  present  claims  is  concerned. 
On  these  considerations,  it  seems  evident  that  interfer- 
ence on  the  part  of  the  government  in  insurance  affairs 

1  The  Banker's  Magazine,  Volume  11,  Page  380. 

2  The  Insurance  Monitor,  1894,  Page  292. 


176  LEGAL  REGULATION. 

is  not  only  justifiable,  but  that  it  is  a  matter  of  duty; 
and  though  the  legislators  in  the  United  States  have 
gone  entirely  too  far  in  the  matter  of  regulation,  ex- 
perience has  justified  the  policy  of  some  state  interfer- 
ence. 

Every  country  which  has  insurance  companies  has 
felt  the  necessity  of  legal  regulation  of  their  business. 
We  are  here  concerned,  however,  only  with  those  enact- 
ments which  are  aimed  at  the  investments.  Along  this 
line  the  action  of  the  different  governments  has  varied 
widely.  Countries  with  similar  institutions  in  most  re- 
spects have  pursued  widely  divergent  policies  in  the  re- 
gulation of  the  investments  of  their  companies.  For  in- 
stance, England,  Canada,  Australia,  and  the  United 
States  have  homogeneous  customs,  precedents,  and  law, 
yet  in  this  particular  form  of  regulation,  the  United 
States  and  Canada  pursue  a  diametrically  opposite  policy 
from  that  of  the  mother  country  and  of  Australia. 

In  seeking  a  cause  of  this  divergence,  it  cannot  be 
found  in  the  greater  evils  which  America  has  suffered 
from  unscientific  and  fraudulent  experiments  in  the 
insurance  business.  England  has  suffered  just  as  much 
from  abuses  in  insurance  as  has  the  United  States,  and 
perhaps  even  more.  However,  her  interests  have  prob- 
ably not  been  injured  so  much  through  the  invest- 
ment side  of  the  business,  and  this  may  account  for  the 
difference  in  the  laws  of  the  two  countries.     One  of  the 


LEGAL  REGULATION.  177 

first  evils  which  had  to  be  combated  in  the  United  States 
in  the  insurance  world  was  the  misuse  of  the  funds 
committed  to  the  care  of  the  companies.  The  spirit 
of  trusteeship  has  always  been  weak  in  this  country, 
and  great  risks  in  investing  have  had  little  terror  even 
to  the  guardian  of  trust  funds.  Added  to  these  ele- 
ments, there  has  been  a  great  abundance  of  speculative 
securities,  giving  the  opportunity  of  which  trustees  were 
prone  to  take  advantage.  Because  of  these  conditions, 
the  American  states  began  to  throw  restrictions  around 
the  investment  of  the  funds,  even  before  it  was  de- 
termined what  were  the  liabilities  of  the  companies. 

An  instance  of  this  cause  of  legislation  regarding  the 
investments  is  seen  in  the  establishment  of  the  state 
insurance  department  of  New  York  in  1859.  Repeat- 
edly during  the  previous  years  companies  had  been 
formed  to  carry  on  the  insurance  business  whose  assets 
consisted  of  mortgages  on  worthless  land,  or  of  bank 
credits  made  to  last  only  until  false  oaths  as  to  their 
ownership  could  be  filed.  This  is  a  typical  instance, 
showing  that  legal  regulation  did  not  come  because  legis- 
latures foresaw  abuses  which  might  arise.  Much  as  one 
may  regret  the  turn  that  legislation  took,  and  however 
mistaken  the  policy  of  regulating  the  investments  has 
proven  to  be,  it  must  be  remembered  that  the  laws 
were  called  into  existence  to  prevent  a  repetition  of  of- 
fences already  committed.     State  after  state  left  the 


178  LEGAL  REGULATION. 

business  untrammeled  until  abuses  became  serious,  and 
the  legislative  bodies  thought  that  the  evils  could  be 
removed  by  regulating  the  investments.  Missouri  prac- 
tically had  no  legislation  on  the  subject  of  insurance 
until  three  or  four  of  her  once  promising  companies  be- 
came insolvent.  Connecticut  had  no  general  law  regu- 
lating investments  until  the  largest  failure  in  the  annals 
of  American  life  insurance  changed  the  policy  of  the 
state  and  forced  upon  the  companies  general  legal 
regulation  of  their  investments.  At  the  present  time, 
the  widespread  demand  for  more  restrictions  upon  the 
investment  power  of  the  companies  is  due  to  the  abuses 
which  managers  have  made  of  their  present  power. 
This  breach  of  faith  on  the  part  of  the  men  conducting 
the  business  must  be  admitted  even  by  those  who  are 
opposed  to  legal  regulation. 

We  have  said  the  legal  regulation  in  this  country 
of  the  investments  has  had  two  objects  in  view,  namely, 
to  secure  the  investment  of  the  assets  in  certain  classes 
of  safe  securities,  and  to  make  those  assets  bear  the 
scrutiny  of  inspection  through  publicity.  Taking  up 
the  latter  purpose  first,  publicity  of  the  investments 
has  not  secured  as  great  results  as  might  have  been 
expected.  This  is  due  to  two  causes.  One  has  been 
that  the  published  reports  of  the  companies  have  not 
always  been  true.  It  has  been  the  duty  of  the  heads 
of  the  various  insurance  departments  to  see  that  the 


LEGAL  REGULATION.  179 

annual  reports  are  a  true  index  of  the  companies'  con- 
dition. But  it  is  a  notorious  fact  that  companies  have 
been  able  to  grossly  misrepresent  their  condition  year 
after  year  to  the  insurance  departments,  and  when 
the  conditions  became  too  bad  to  be  longer  concealed, 
the  assets  which  some  of  these  companies  possessed  did 
not  have  a  value  equal  to  a  third  of  that  reported.  The 
duty  of  the  insurance  commissioners  is  to  make  periodi- 
cal examinations  of  the  companies,  but  too  often  these 
inspections  have  been  made  of  little  avail,  because  the 
inspector  has  not  descended  into  the  strong  rooms  of 
the  companies  and  examined  the  securities  in  detail. 
The  public  has  been  lulled  to  sleep,  thinking  that  such 
examinations  were  made,  and  the  companies,  undis- 
turbed by  official  examinations  or  by  inquiry  by  the 
public,  have  violated  sound  business  rules  with  im- 
punity. 

However,  neither  the  state  insurance  departments 
nor  the  managers  of  companies  should  receive  all  the 
blame.  Private  vigilance  can  discover  few  of  the  weak- 
nesses in  life  insurance  companies,  but  the  existence  of 
the  best  public  supervision  would  have  hardly  justified 
the  lack  of  discrimination  by  the  public  which  has  been 
so  manifest  in  the  United  States.  Apparently  all  ob- 
ligation to  see  that  the  companies  are  well  managed 
has  been  shifted  to  the  state  by  an  apathetic  public, 
and  this  complete  dependence  upon  state  supervision 


180  LEGAL  REGULATION. 

which  has  not  been  efficient  has  been  the  means  by 
which  weak  companies  have  perpetuated  their  existence 
far  beyond  their  time  of  "  actuarial "  insolvency. 

The  other  reason  why  publicity  of  the  assets  has  not 
accomplished  much  is  because  there  can  be  no  real  pub- 
licity in  regard  to  a  large  amount  of  the  assets.  A 
list  can  be  printed  of  the  stocks  and  bonds  owned  by  a 
company  and  the  public  can  examine  these  for  itself. 
Similarly  the  securities  pledged  for  collateral  loans  can 
be  published  and  the  safety  of  such  loans  determined. 
However,  when  other  classes  of  assets  are  considered, 
it  is  readily  seen  that  the  published  report  can  give 
little  idea  of  the  real  value  of  the  investment.  Take 
mortgage  loans  as  an  instance.  Their  safety  depends 
upon  the  value  of  the  land  mortgaged.  The  published 
report  does  not  give  this,  and  even  if  the  specific  pieces 
of  property  mortgaged  were  given,  which  perhaps  might 
be  desirable,  the  report  would  still  give  little  knowledge 
to  the  average  policy-holder,  since  he  can  know  land 
values  only  in  his  particular  vicinity.  Thus,  of  a  class 
of  investments  forming  from  twenty  to  ninety  per  cent, 
of  the  total  assets  of  various  companies  the  annual  re- 
port can  show  nothing  but  a  mere  statement  of  value. 

Such  a  condition  detracts  greatly  from  the  utility  of 
publicity.  It  accounts  to  a  certain  degree  for  the  fact 
that  some  companies  during  the  seventies  with  large 
mortgage  holdings  continued  to  beguile  not  only  the 


LEGAL  REGULATION.  181 

public  but  the  insurance  commissioners  long  after  they 
were  insolvent.  However,  this  does  not  indicate  that 
such  itemised  accounts  of  the  assets  as  have  been  given 
have  been  of  no  value  or  now  should  be  omitted  from 
the  official  annual  reports.  It  simply  points  out  the 
necessity  of  relying  upon  the  state  insurance  depart- 
ments to  see  that  certain  parts  of  the  assets  are  secure. 
It  emphasises  the  responsibility  upon  the  state  and  the 
lack  of  power  of  the  individual. 

The  other  object  of  legal  regulation  has  been  to  se- 
cure safety  of  the  assets  by  limiting  the  power  of  the 
companies  in  the  investment  field.  We  have  seen  the 
enactments  by  which  the  states  hoped  to  accomplish 
their  purpose.  It  is  extremely  difficult  to  learn  what 
has  been  the  effect  of  these  laws  defining  legal  invest- 
ments. They  were  passed  to  prevent  a  recurrence  of 
abuses  already  committed,  but  there  have  been  most 
serious  evils  in  the  insurance  business  since  they  were 
passed.  In  the  first  place  it  is  to  be  noticed  that  the 
legal  limitations  upon  the  investments  have  not  pre- 
vented numerous  failures  of  companies.  New  York  was 
the  pioneer  in  such  legislation,  and  yet  more  than  half 
the  companies  organised  in  that  State  have  become  in- 
solvent, and  especially  is  this  true  of  the  period  when 
the  restrictions  upon  the  investments  were  the  most 
severe.  It  would  be  rash  to  say  of  these  failures  or  of 
any  failures  of  insurance  companies  that  they  were  due 


182  LEGAL  REGULATION. 

to  poor  investments  alone,  for  poor  investments  seem  to 
be  related  to  bad  management  in  general.  However, 
the  fact  remains  that  in  states  having  some  of  the 
strictest  requirements  for  the  investment  of  insurance 
funds,  companies  have  succeeded  in  investing  their 
funds  in  unsafe  securities. 

There  are  some  who  urge  that  the  want  of  success 
of  the  present  laws  has  been  due  to  the  liberality  of 
the  laws.  They  claim  that  the  restrictions  have  em- 
braced such  a  large  field  that  many  chances  for  fraud- 
ulent practices  were  included.  Many  of  the  failures 
could  have  been  avoided,  and  abuses  still  existing  would 
never  have  occurred,  it  is  further  said,  if  the  states 
had  specified  certain  securities  in  which  the  companies 
could  invest.  Thus,  instead  of  allowing  them  to  buy 
any  railroad  bonds,  have  the  legislature  select  certain 
roads  whose  bonds  could  be  purchased.  To  adopt  such 
a  plan  would  be  a  serious  mistake.  It  might  or  it 
might  not  secure  greater  safety  of  the  investments,  but 
we  may  be  sure  that  it  would  be  a  heavy  task  to  impose 
upon  the  state  legislatures  the  duty  of  selecting  the  se- 
curities. The  pressure  which  interested  financiers  would 
bring  to  bear  upon  the  law-makers  to  get  securities  ac- 
cepted would  not  be  conducive  to  good  government, 
and  securities  selected  under  such  pressure  would  not 
always  be  safe.  Besides  this  serious  objection  to  the 
plan,   its   adoption  would  also  mean  a  lower  rate  of 


LEGAL  BEGULAT10N.  183 

earning  power  on  the  assets,  and  thus  insurance  would 
cost  more.  Because  of  these  objections  to  this  plan  of 
specifying  certain  securities,  it  has  never  received  strong 
support. 

However,  there  is  a  vigorous  demand  for  a  more 
moderate  reform  than  the  above.  It  is  pointed  out  that 
most  of  the  abuses  in  the  investment  field,  at  least  at 
present,  are  due  to  the  close  alliance  between  insurance 
companies  and  other  corporations  through  the  stock  in- 
vestments by  the  former.  Therefore  it  is  argued  that 
if  the  state  would  prohibit  the  insurance  companies 
from  purchasing  stock  a  long  step  would  be  made  to- 
ward freeing  insurance  assets  from  many  dangers. 

We  must  admit  that  there  is  much  force  in  this  argu- 
ment. We  have  pointed  out  in  a  previous  chapter  the 
peculiar  position  of  an  investor  in  stocks  in  relation  to 
the  corporation  whose  stock  is  purchased.  He  is  the 
owner  of  the  business  to  the  extent  of  his  stock  pur- 
chase, and  as  owner  he  is  responsible  for  the  control  of 
that  enterprise.  A  law  prohibiting  stock  investments 
by  insurance  companies  would  prevent  them  from  en- 
tering into  this  relation  of  ownership,  and  undoubtedly 
would  remove  some  of  the  power  now  wielded  by  large 
insurance  accumulations. 

Notwithstanding  the  strong  arguments  in  favor  of 
this  stricter  limitation  of  the  investment  field,  we  be- 
lieve that  there  are  serious  reasons  why  the  plan  should 


1 84  LEGAL  REG  ULA  TION. 

not  be  adopted,  and  in  fact  why  all  legal  regulation  of 
the  investments  should  be  removed.  The  repeal  of  ex- 
isting laws  and  the  granting  of  freedom  in  the  future 
to  the  companies  in  making  their  investments  is  advo- 
cated on  the  following  grounds. 

1.  A  limitation  of  the  investment  field  will  not 
necessarily  bring  safety,  and  it  involves  a  reduction  in 
the  earning  power  of  the  assets. 

2.  Previous  laws  have  had  a  pernicious  effect. 

3.  Legal  regulation  is  ineffective  to  prevent  misuse 
of  funds. 

4.  Legal  regulation  leads  to  a  decrease  in  personal 
responsibility. 

5.  The  desired  result  can  be  obtained  in  a  more 
effective  manner. 

Taking  up  these  objections  to  legal  regulation  in 
order,  in  the  first  place  it  must  be  realised  that  there 
are  poor  and  unsafe  investments  in  every  field,  and 
the  best  stocks  are  better  than  many  bonds,  yet  by 
limiting  the  field  to  bonds,  the  states  are  compelling  the 
companies  to  take  less  attractive  securities  than  they 
otherwise  would  if  there  were  no  limitations.  Again, 
investment  in  stocks  does  not  necessarily  mean  that 
evils  are  sure  to  come  to  the  company.  If  the  manage- 
ment is  worthy,  such  investments  may  be  a  source  of 
much  profit  to  the  policy-holders,  and  if  the  management 
is  unworthy  of  confidence,  it  does  not  make  much  dif- 


JNIV 

OF 

LEGAL  REGULATION.  185 

ference  how  many  restrictions  are  thrown  around  the 
investments.  JSTo  one  claims  that  the  companies  should 
not  he  allowed  to  invest  in  mortgage  loans,  yet  mana- 
gers have  used  this  outlet  for  as  shameful  speculation 
with  policy-holders'  funds  as  was  ever  made  in  stocks. 
The  evidence  before  the  Armstrong  investigating  com- 
mittee during  the  past  year  did  not  show  that  the 
company  without  any  investments  in  stocks  had  been 
any  freer  from  certain  practices,  now  much  condemned, 
than  were  the  companies  with  large  stock  holdings.  The 
fault  lies  not  with  the  investments,  but  with  the  manage- 
ment controlling  the  assets. 

If  the  companies  are  confined  to  certain  classes  of 
securities,  not  only  will  poorer  securities  in  those  classes 
be  purchased,  than  the  best  in  other  classes,  but  the  com- 
petition for  them  will  be  so  keen  as  to  drive  the  rate 
of  interest  down.  No  one  knows  to  what  extent  in- 
surance accumulations  will  grow  and  it  would  be  an 
economic  loss  to  the  country  if  they  were  confined 
to  certain  low-interest  bearing  securities.  Besides  it 
would  make  insurance  more  expensive  to  the  public,  a 
condition  hardly  desirable. 

It  may  seem  radical  to  advocate  the  repeal  of  the  ex- 
isting laws  regulating  investments,  but  such  action  is 
justified  by  a  study  of  the  effects  such  laws  have  had. 
It  is  pretty  difficult  to  point  out  any  good  that  has 
been   accomplished,   but  it  is   clear   that  there   have 


186  LEGAL  REGULATION. 

been  pernicious  results  which  can  be  attributed  to  the 
laws.  A  prominent  case  in  point  in  the  New  York 
law  confining  mortgage  loans  to  New  York  real  estate, 
a  law  which  was  in  force  for  years.  For  some  time  that 
law  may  have  been  beneficial,  at  least  it  did  not  inter- 
fere much  with  the  companies.  When  assets  were  small 
they  naturally  would  have  been  invested  near  home. 
When  the  assets  became  larger,  the  effect  of  the  law 
was  mischievous.  The  New  York  companies  were  re- 
stricted to  a  narrow  field  to  compete  with  savings  banks 
and  trustees  confined  by  law  in  the  same  way.  The 
rate  of  interest  on  mortgage  loans  went  down,  and  the 
insurance  companies,  unlike  savings  banks,  which  are 
local,  had  to  face  the  rivalry  of  companies  from  other 
states  which  were  earning  a  higher  rate  of  interest.  To 
maintain  themselves,  the  New  York  companies  turned 
to  other  fields  of  investment,  namely,  large  collateral 
loans,  deposits  in  trust  companies,  and  corporation  se- 
curities, the  very  class  of  assets  which  it  is  now  wanted 
that  they  should  give  up.  Connecticut  did  not  allow 
the  Charter  Oak  to  buy  railroad  bonds.  It  did  not 
buy  such  bonds,  but  it  took  the  personal  note  of  the 
president  of  a  railroad,  and  later  came  into  possession 
of  the  second  mortgage  bonds  of  the  railroad.  It  might 
not  have  been  that  the  Charter  Oak  would  have  pur- 
chased better  railroad  bonds  if  it  had  been  free  to  do 
so,  but  certainly  the  justification  of  loaning  on  a  per- 


LEGAL  REGULATION.  187 

sonal  note  would  have  been  lacking.  These  are  but 
two  instances  of  the  bad  effect  of  the  law  regulating 
investments,  but  they  could  be  duplicated  by  a  number 
of  others  during  the  last  thirty  years. 

This  leads  to  a  discussion  of  the  third  objection  to 
the  laws,  namely,  their  ineffectiveness  to  prevent  abuses. 
For  instance,  what  shall  be  done  about  cash  deposits 
in  banks  and  trust  companies?  Just  how  the  states 
can  regulate  the  amount  of  these  deposits  and  not  do 
serious  injury  to  the  business  is  difficult  to  understand, 
yet  it  is  through  the  cash  deposits  that  many  of  the 
most  serious  evils  have  crept  into  the  business.  The 
advocates  of  state  supervision  say  that  surely  insurance 
funds  must  not  be  allowed  to  be  used  in  promoting  new 
industrial  enterprises.  It  is  by  far  the  best  thing  for 
insurance  companies  to  keep  out  of  that  sort  of  thing, 
but  they  had  better  be  allowed  to  do  it  openly  than 
through  the  medium  of  a  trust  company  which  uses 
the  cash  deposits  of  the  insurance  corporation.  If 
insurance  funds  are  to  be  used  in  underwriting  securi- 
ties, it  is  better  that  the  company  should  do  it  openly 
and  get  the  profits  rather  than  the  officials  who  do  it 
secretly.  The  ineffectiveness  of  legal  regulation  is  seen 
in  another  respect.  The  Prussian  law  compelled  the 
American  companies  to  sell  their  stocks  as  a  prerequisite 
to  doing  business  in  that  country.  One  large  company 
did  so,  but  how?     By  transforming  them  into  bonds 


188  LEGAL  REGULATION. 

through  the  agency  of  a  holding  company.  That  in- 
surance company  was  not  strengthened  by  this  sale  of 
stocks.  Eather  it  was  weakened,  for  now  in  looking 
over  its  published  assets,  the  public  cannot  learn  just 
what  is  the  security  behind  these  new-fashioned  bonds. 

The  fourth  objection  to  legal  regulation,  especially  of 
the  present  type  in  most  of  the  states,  is  that  it  is 
so  general  in  character  as  to  have  very  little  positive 
force.  Many  of  the  laws  are  only  the  semblance  of  regu- 
lation, yet  the  public  gets  the  false  impression  that  its 
interests  are  safe-guarded  when  they  are  not.  At  the 
same  time  officers  of  insurance  companies  may  feel  that 
they  have  done  their  duty  to  the  investments  when 
they  have  not  overstepped  the  boundaries  set  for  them 
by  law,  when  in  fact  they  could  have  done  much  better 
toward  getting  safer  and  more  remunerative  assets. 

On  these  grounds  it  is  advocated  that  legal  regulation 
of  the  investments  should  be  abolished.  Especially  is 
this  urged  when  it  is  possible  that  a  more  efficient 
method  can  be  devised  to  secure  good  management  of 
the  assets.  The  discussion  of  this  method  will  form 
the  subject  of  the  succeeding  chapter. 

However,  before  leaving  this  chapter  something  should 
be  said  about  the  state  departments  of  insurance.  If 
the  method  of  treating  the  companies  here  advocated 
is  ever  adopted,  its  success  will  depend  in  a  large  meas- 


LEGAL  REGULATION.  189 

ure  upon  a  more  efficient  organisation  by  the  states  of 
their  supervisory  departments  of  insurance. 

State  officials  must  be  secured  who  are  able  and  coura- 
geous enough  to  find  what  is  the  true  situation  within 
a  company.  Having  once  learned  the  facts,  the  state 
must  publish  them  fully  so  that  an  intelligent  opinion 
can  be  formed.  If  all  sorts  of  stocks  are  bought  by  a 
company,  if  it  is  engaged  in  promoting  new  enterprises, 
and  in  underwriting  securities,  the  public  must  know 
about  it  and  policy-holders  present  and  prospective  must 
care  enough  about  the  situation  to  become  interested. 
With  the  greater  freedom  of  investment,  should  come 
changes  in  the  methods  of  management  of  the  com- 
panies, and  the  character  of  these  changes  will  now  be 
discussed. 


CHAPTEE  VII. 


CONTROL    OF    THE    ASSETS. 


In  the  preceding  chapter,  the  conclusion  reached  was 
that  legal  regulation  of  the  investments  should  be 
abolished.  It  is  claimed  by  many  that  such  a  step  would 
be  disastrous  to  the  insurance  interests  of  the  country. 
An  eminent  actuary  said  a  few  years  ago  that  he  was 
sure  that  without  the  present  state  supervision  of  the 
investments,  it  would  very  quickly  happen  that  ad- 
vantage would  be  taken  to  secure  control  of  companies 
for  the  purpose  of  using  their  assets  to  help  out  other 
undertakings.  If  such  would  be  the  result  of  the  re- 
peal of  the  present  enactments  it  would  be  a  most 
serious  objection  to  the  policy  which  we  advocate. 

The  answer  to  this  objection  is  that  we  do  not  need 
to  wait  until  the  legal  regulations  of  the  investments 
are  removed  to  have  attempts  made  to  secure  control 
over  the  assets  of  insurance  companies.  Almost  from 
the  very  beginning  of  life  insurance  in  this  country, 
men  have  deliberately  gone  about  to  secure  control  of 
companies,  and  once  successful,  have  exploited  the  assets 
for  their  own  particular  ends.      If  there  is  any  fact 

190 


CONTROL  OF  THE  ASSETS.  191 

which  stands  out  more  prominently  than  others  after 
a  study  of  failed  life  insurance  companies,  it  is  not 
that  danger  of  failure  comes  from  poor  investments  due 
to  a  lack  of  judgment  on  the  part  of  the  officers  of  a 
company,  but  that  the  great  cause  of  failure  is  due  to 
mismanagement  and  fraud.  When  the  officers  of  the 
Globe  lent  money  on  the  stock  of  a  railroad  which  had 
not  been  built,  and  never  was,  that  was  an  appropria- 
tion of  the  funds  which  was  made  wilfully.  A  clique 
obtained  control  of  the  Charter  Oak  not  for  the  purpose 
of  making  investments  of  its  funds  for  the  good  of 
the  policy-holders,  but  to  help  out  their  own  private 
enterprises.  The  syndicate  which  wrecked  the  American 
Life  never  had  any  other  purpose  in  view  than  to  get 
its  assets  as  quickly  as  possible.  These  instances  are 
given  to  show  that  even  under  legal  regulations  more 
strict  than  most  of  the  present  laws,  the  accumulated 
funds  of  life  companies  have  been  the  prey  of  designing 
men. 

It  is  not  contended  that  the  removal  of  the  present 
restrictions  over  the  investments  would  remove  the 
danger  of  companies  falling  into  improper  hands. 
Quite  the  contrary,  it  would  emphasise  that  danger  but 
in  doing  so  would  direct  the  attention  of  the  public  and 
of  legislators  to  the  vulnerable  point  in  insurance  man- 
agement. As  companies  become  larger  and  assets  in- 
crease in  amount  the  proper  control  of  them,  already 


192  CONTROL  OF  THE  ASSETS. 

a  vital  question,  will  become  of  almost  supreme  im 
portance. 

What  are  the  specific  evils  that  have  cropped  out  in 
the  management  of  the  assets  ?  They  are,  first,  that  the 
officers  and  directors  of  some  companies  have  made  in- 
direct, if  not  direct  profit  from  the  investments  which 
they  make  of  their  company's  funds;  that  the  direc- 
tors or  trustees  in  many  cases  where  they  have  not  been 
improperly  interested  in  the  disposition  of  the  funds 
have  taken  no  interest  whatever  in  the  management  of 
their  company;  and  lastly,  that  the  policy-holders  in 
mutual  companies  have  never  come  to  realise  that  the 
assets  belong  to  them,  and  that  the  responsibility  for 
their  proper  management  in  the  last  resort  really  rests 
upon  them. 

These  weaknesses  in  the  management  have  been  long 
apparent  and  a  number  of  states  have  tried  to  eradi- 
cate them  through  legislation.  Taking  the  first  abuse, 
that  of  the  officers  and  directors  making  a  personal  profit 
from  the  investments,  five  states  have  enacted  strict  laws 
prohibiting  such  practices.  Without  going  into  a  history 
of  these  enactments  but  taking  the  situation  as  it  is 
at  present,  Texas  has  a  law  which  if  it  was  enforced 
would  leave  little  to  be  desired  in  this  respect.  This 
law  provides  that  "  any  stockholder,  director,  member 
of  a  committee,  officer,  or  clerk  of  a  home  company 
who  is  charged  with  the  duty  of  handling  or  investing 


CONTROL  OF  THE  ASSETS.  193 

its  funds  shall  not  deposit  or  invest  such  funds  except 
in  the  corporate  name  of  such  company;  shall  not  bor- 
row the  funds  of  such  company ;  shall  not  be  interested 
in  any  way  in  any  loan,  pledge,  security  or  property 
of  such  company  except  as  stockholder;  shall  not  take 
or  receive  to  his  own  use  any  fee,  brokerage,  commis- 
sion, or  gift  or  other  consideration  for  or  on  account  of 
a  loan  made  by  or  on  behalf  of  such  company,"  *  New 
York,2  Massachusetts,3  North  Dakota,4  and  Nevada,5  all 
have  laws  which,  while  not  as  stringent  as  the  Texas 
statute,  still  aim  to  eliminate  the  same  abuses. 

No  one  questions  the  propriety  of  such  laws,  they  can 
only  lament  their  necessity.  That  the  officers  or  direc- 
tors of  a  company  should  make  a  personal  gain  out 
of  the  investment  of  the  funds  which  they  control 
is  repugnant  to  business  morality.  But  the  laws  have 
not  accomplished  much.  Whether  this  is  due  to  the 
difficulty  of  determining  when  the  law  has  been  in- 
fringed, or  to  the  lack  of  specific  provision  for  punish- 
ment when  broken,  or  to  the  fact  that  public  officials 
have  not  tried  to  enforce  the  act,  is  difficult  to  say. 
Since  the  passage  of  the  act  in  New  York,  there  have 
been  a  number  of  violations  of  it,  apparently  flagrant. 

1  Section  56,  Chapter  IV,  Insurance  Laws,  Digest  of  1903. 

*  Chapter  434,  Laws  of  1881,  and  Section  9,  Chapter  326,  Laws 
of  1906. 

8  Section  25,  Chapter  18,  Revised  Statutes. 

*  Section  3107  Chapter  14,  Revised  Code. 
&  Section  3,  Act  of  February  23,  1881. 

13 


194  CONTROL  OF  THE  ASSETS. 

In  the  famous  investigation  a  number  of  years  ago 
of  one  of  our  larger  companies  having  its  domicile 
in  New  York,  it  was  found  that  for  years  the  company 
had  been  purchasing  its  securities  from  but  one  broker- 
age firm.  The  senior  member  of  that  firm  was  a  trustee 
in  the  insurance  company  and  a  member  of  its  finance 
committee.  During  the  period  of  his  connection  with 
the  company,  his  firm  received  commissions  on  sixty 
million  dollars  worth  of  securities  sold  to  the  insur- 
ance corporation.  It  may  be  granted  that  the  insurance 
company  did  not  suffer  through  this  close  connection, 
but  nevertheless  it  should  never  have  been  allowed,  for  it 
was  a  clear  violation  of  law. 

Men  connected  with  the  companies  and  even  disin- 
terested authorities  claim  that  there  are  advantages 
accruing  to  the  insurance  corporation  in  having  men  on 
its  finance  committee  who  have  close,  perhaps  official, 
connection  with  other  financial  concerns.  It  is  urged 
that  such  men  are  in  close  contact  with  financial  move- 
ments, know  the  value  of  securities  which  the  insurance 
company  needs,  and  whatever  advantage  they  may  ob- 
tain as  financiers  are  properly  shared  by  the  insurance 
company.  This  situation  is  hardly  possible.  To  serve 
a  banking  house  well,  an  official  connected  with  it  is 
interested  in  selling  securities  at  a  high  price,  for  that 
same  man  to  do  equally  well  by  the  insurance  company 
he  ought  to  buy  just  as  cheaply  as  possible.     The  in- 


CONTROL  OF  THE  ASSETS,  195 

terests  of  the  two  companies  are  diametrically  opposed 
and  no  man  can  do  his  best  for  both. 

The  particular  statute  which  Texas  has  enacted  should 
be  copied  in  other  states  and  enforced.  If  it  is  found 
that  present  penalties  are  not  severe  enough,  its  viola- 
tion can  be  made  a  penal  offense.  It  is  not  necessary 
that  there  should  be  a  close  alliance  between  insurance 
and  other  financial  enterprises  such  as  banks  and  trust 
companies.  The  labor  of  running  an  insurance  com- 
pany is  great  enough  to  command  men  with  the  highest 
talent,  salaries  are  ample  and  if  they  are  not,  it  would 
be  to  the  policy-holders'  interest  to  pay  enough  to  get 
men  who  will  give  their  company  their  undivided  at- 
tention, rather  than  pay  half  as  much  and  get  men  who 
divide  their  energies  between  several  undertakings. 

We  have  spoken  so  far  about  the  officers  of  the  com- 
panies for  the  most  part.  These  officers,  in  theory,  owe 
their  positions  to  the  board  of  directors  or  trustees  of 
a  company  and  are  responsible  to  those  trustees.  A 
trustee  of  an  insurance  company  is  in  a  peculiar  posi- 
tion. The  directors  or  trustees  in  nearly  all  other  lines 
of  business  hold  their  positions  because  they  are  the 
representatives  of  large  financial  interests  in  that  par- 
ticular line  of  business.  They  either  themselves  own  a 
large  amount  of  its  capital  stock  or  represent  a  com- 
bination which  does.  Therefore  their  action  is  deter- 
mined by  the  one  consideration,  namely,  that  of  securing 


196  CONTROL  OF  THE  ASSETS. 

the  greatest  net  return  upon  their  investment.  All  the 
property  they  control  is  their  own.  But  life  insurance 
companies  are  extremely  different.  Even  in  stock  life 
companies  where  the  directors  are  perforce  owners  of 
some  shares  in  the  corporation,  these  directors  soon 
come  into  the  control  of  much  larger  funds  than  their 
original  investment.  In  the  case  of  the  mutual  com- 
pany, there  has  been  no  investment  by  the  trustee  what- 
ever, and  his  relationship  to  the  funds  is  one  of  trust 
entirely. 

This  anomalous  situation  of  life  insurance  companies' 
boards  is  further  complicated  by  another  condition. 
Men  have  been  chosen  frequently,  indeed  almost  as  a 
rule,  for  directors  or  trustees  not  because  of  any  par- 
ticular interest  which  they  have  had  in  the  business,  but 
because  their  names  were  prominent  ones  in  the 
financial  world.  These  men  have  accepted  the  responsi- 
bility, but  loaded  down  with  the  burden  of  business  in 
which  they  have  a  direct  pecuniary  interest  they  have, 
in  many  cases,  given  but  little  time  to  the  insurance 
company.  The  name  of  "  dummy  "  has  been  given  to 
such  directors,  and  the  dummy  has  played  an  important 
role  in  insurance  history.  In  the  seventies,  when  the 
companies  were  younger  and  smaller  than  now,  such  di- 
rectors and  trustees  were  numerous.  They  did  not  per- 
form the  duties  of  their  positions  and  officers  looted  com- 
panies of  their  assets  almost  at  will.    Many  of  the  com- 


CONTROL  OF  THE  ASSETS.  197 

panies  which  failed  had  boards  of  trustees  composed  of 
able  men.  Now,  it  may  be  valuable  in  some  ways  to 
a  new  company  to  have  a  board  made  up  of  prominent 
figure-heads,  but  on  the  whole  that  policy  has  proved 
unsatisfactory  in  this  country.  Unless  the  men  chosen 
for  these  positions  are  interested,  and  able  to  give  part 
of  their  time  to  close  supervision  over  the  business  of 
the  company,  that  company  is  weaker  for  their  names 
being  there  than  if  they  were  absent.  They  give  the 
company  the  appearance  of  strength  which  it  has  not. 
We  could  be  much  more  assured  of  a  hopeful  future  for 
the  companies  and  of  a  more  beneficial  use  of  the  assets 
both  from  the  standpoint  of  the  policy-holder  and  of 
the  public,  if  the  so-called  dummy  director  could  be 
eliminated. 

Boards  of  directors  or  trustees  composed  of  able  but 
very  busy  men  have  been  more  than  willing  to  delegate 
their  powers  to  others.  Such  a  procedure  would  have 
been  necessary  in  the  case  of  a  number  of  companies 
with  their  large  unwieldy  boards,  but  the  directors  have 
too  often  escaped  all  their  duties  by  delegating  their 
powers  to  a  committee  of  the  board  and  then  making  the 
officers  of  the  company  a  quorum  of  this  committee.  An 
examination  of  the  charters  and  by-laws  of  the  com- 
panies under  consideration  in  this  thesis  shows  that  in 
nearly  all  cases  a  committee  of  the  board  has  charge  of 
the  investments.    This  committee  has  two  typical  forms, 


198  CONTROL  Oi'  THE  ASSETS. 

one  type  being  a  committee  composed  almost  exclusively 
of  board  members,  and  the  other  type  being  a  committee 
of  which  board  members  still  form  a  majority,  though 
the  officers  of  the  company  upon  it  are  so  numerous  as 
to  be  able  to  form  a  quorum. 

Of  this  last  type,  the  Berkshire  is  a  good  example.  In 
that  company,  the  President,  the  Vice-President,  the 
Treasurer,  and  four  members  of  the  board  of  directors 
constitute  the  financial  committee.  Three  of  the  num- 
ber may  do  business  provided  they  all  concur.1  The 
Equitable  is  another  familiar  example.  Here  the  ex- 
ecutive committee  which  consists  of  the  President,  the 
Vice-President,  and  the  Comptroller,  the  chairman  of 
the  Finance  Committee  and  five  other  directors,  has 
charge  of  the  investments.  Pour  of  these  shall  be  a 
quorum.  Thus,  in  these  two  companies,  the  board  of 
directors  has  practically  shifted  all  responsibility  of 
making  investments  and  caring  for  the  assets  upon  the 
executive  officials  of  the  company. 

The  finance  committee  of  the  Massachusetts  Mutual 
consists  of  six  directors,  including  the  President,  ex  of- 
ficio, and  three  members  may  constitute  a  quorum  for 
the  transaction  of  business.  The  ISTew  York  Life,  the 
Home,  the  Germania,  the  State  Mutual,  the  Michigan 
Mutual,  and  the  Northwestern,  all  have  finance  commit- 
tees similarly  composed.  The  trustees  of  the  Mutual  of 
1  Section  8,  By-Laws. 


CONTROL  OF  THE  ASSETS.  199 

New  York  and  the  Phoenix  and  the  directors  of  the 
Aetna  have  retained  the  control  of  the  investments 
exclusively  in  their  own  hands.  In  all  the  companies 
the  president  is  the.  presiding  officer  of  the  board  of 
directors  or  trustees. 

The  result  of  this  action  on  the  part  of  trustees  and 
directors  in  transferring  their  power  to  the  executive 
officials  is  that  the  companies  are,  to  all  intents  and 
purposes,  run  by  their  officers.  When  mistakes  or 
frauds  crop  out  in  these  managements  the  directors  take 
refuge  in  the  plea  that  they  did  not  know  what  was  going 
on.  It  is  the  one  man  power,  or  the  power  of  a  small 
clique  in  a  company,  that  makes  life  insurance  assets  a 
desirable  prize  to  be  sought,  and  which  leads  to  a  use 
of  these  accumulations  which  never  would  be  sanctioned 
by  the  policy-holders  to  whom  they  belong.  The  presi- 
dent of  a  company  should  not  control  the  investments 
nor  have  sole  custody  over  the  assets.  In  the  great 
railway  reorganizations  the  separate  functions  of  the 
president  of  the  company  and  presiding  officer  of  the 
board  of  directors  has  often  been  vested  in  two  persons. 
This  is  the  system  employed  in  English  insurance  com- 
panies and  though  these  companies  have  not  had  the 
rapid  growth  characteristic  of  American  companies, 
nevertheless  they  have  had  an  expansion  which  has  been 
healthy  and  not  produced  at  a  tremendous  cost. 

There  can  be  no  doubt  but  that  much  of  the  misman- 


200  CONTROL  OF  THE  ASSETS. 

agement  of  the  assets  and  improper  investments  could 
be  obviated  if  the  responsibility  of  their  control  could 
be  fixed  upon  the  men  to  whom  it  belongs.  The  board 
jf  directors  or  trustees  must  be  brought  to  know  that 
their  duty  is  not  over  when  they  have  heard  read  the 
annual  report  of  the  company,  and  they  have  been  per- 
functorily reelected  by  the  officials.  It  has  been  sug- 
gested that  laws  be  enacted  providing  that  an  insurance 
company  should  not  be  permitted  to  loan  or  invest  any 
money  except  at  a  regular  meeting  of  the  board  of  di- 
rectors and  that  each  director's  vote  should  be  recorded. 
This  would  create  a  personal  responsibility  in  each  case, 
an  end  very  much  to  be  desired.  If  it  be  objected  that 
this  is  a  cumbersome  method,  as  perhaps  it  is,  the  same 
end  might  be  accomplished  by  holding  every  man  whose 
duty  it  is  to  know  the  condition  of  the  company  re- 
sponsible, civilly,  and  in  criminal  prosecution  for  any 
material  mismanagement  of  the  assets,  and  for  any 
serious  misstatement  in  the  annual  reports  of  a  com- 
pany. If  there  was  certain  punishment  for  fraud 
in  insurance  managements,  and  if  the  officers  and  di- 
rectors were  held  accountable  for  any  malfeasance  or 
breach  of  trust,  a  long  step  would  have  been  taken  to- 
ward the  protection  of  the  assets. 

However,  when  the  responsibility  of  managing  insur- 
ance accumulations  is  lodged  with  the  board  of  direc- 
tors or  trustees,  as  the  case  may  be,  much  remains  to 


CONTROL  OF  THE  ASSETS.  201 

be  accomplished.  The  members  of  these  boards  secure 
their  positions  theoretically  either  as  representatives  of 
stock-holders,  or  of  policy-holders.  Of  all  the  questions 
in  the  insurance  world  there  is  none  more  vitally  im- 
portant than  the  problem  of  securing  the  control  of  the 
assets  to  those  who  really  own  them.  The  problem  is 
a  difficult  one  with  mutual  companies  and  still  more 
complex  in  the  case  of  stock  companies. 

The  case  of  the  stock  companies  will  be  considered 
first  because  the  dangers  are  more  pronounced  in  the 
case  of  such  companies.  It  is  not  necessary  to  go  into 
the  history  of  stock  companies.  The  states  have  always 
allowed  such  companies  to  be  formed,  and  in  fact  after 
the  scandals  attaching  to  the  organization  and  subse- 
quent failure  of  many  of  the  earlier  companies,  even 
passed  laws  which  made  the  formation  of  anything  but 
a  stock  company  difficult.  The  purpose  of  such  laws 
was  good.  During  the  early  years  of  a  company's  exist- 
ence the  expenses  are  heavy,  and  unless  some  sort  of 
capital  is  put  up  the  company  is  likely  to  fail.  How- 
ever, the  legislation  which  the  states  have  enacted  in 
this  respect  has  had  the  boomerang  effect  noticeable  in 
so  much  of  insurance  legislation,  and  which  we  have 
clearly  seen  in  the  case  of  the  investments.  Most  of 
the  laws  made  no  provision  for  a  retirement  of  the 
capital  stock,  and  as  companies  formed  under  those 
laws  have  outgrown  the  necessity  of  such  stock,  it  has 


202  CONTROL  OF  THE  ASSETS. 

remained  as  a  dangerous  tool  by  which  men  can  obtain 
control  of  valuable  assets,  and  in  obviating  one  danger, 
the  laws  have  brought  on  a  more  potent  one.  A  control 
of  the  capital  stock  has  been  usually  retained  in  the 
hands  of  a  single  person  or  of  a  small  group,  and  thus 
such  companies  are  always  exposed  to  the  danger  of 
those  persons  misusing  their  power,  and  still  being  able 
to  retain  their  positions  or  of  selling  their  control  to 
some  one  who  will.  It  is  an  absurdity  that  a  few  thou- 
sand dollars  of  stock  should  control  absolutely  millions 
of  dollars  belonging  to  another  set  of  persons.  If  stock 
companies  were  confined  to  writing  non-participating 
policies,  and  did  nothing  to  impair  their  ability  to  carry 
out  the  contracts  entered  into  by  them  no  objection 
could  be  raised  to  the  stockholders  using  the  assets  for 
any  purpose  they  might  see  fit.  When,  however,  such 
companies  are  allowed  to  write  participating  policies 
and  men  are  induced  to  insure  in  them  with  the  under- 
standing that  they  are  to  get  the  profits  of  the  business, 
then  the  stock  control  becomes  an  unfortunate  condition. 
With  any  kind  of  policy,  participating  or  non-partici- 
pating, the  danger  to  a  stock  company  from  some  specu- 
lator by  a  small  investment  getting  control  of  much 
larger  assets  will  always  remain.  With  the  stock  cen- 
tralised in  a  few  hands  the  plan  is  easier  of  accomplish- 
ment, and  the  history  of  the  American  Life,  though  a 
company  with  small  assets,  shows  how  easily  control 


CONTROL  OF  THE  ASSETS.  203 

of  a  stock  company  can  sometimes  be  secured  and  its 
assets  dissipated. 

The  states  should  change  their  laws  immediately.  If 
it  is  still  considered  necessary  to  have  capital  stock  as 
a  guarantee  of  early  stability,  let  the  states  provide  for 
its  compulsory  retirement  at  a  time  when  the  solvency 
of  the  company  will  not  be  impaired.  Such  laws  have 
already  been  enacted  and  have  worked  satisfactorily. 
Another  way  in  which  mutual  life  insurance  companies 
can  be  started  successfully  is  through  the  operation 
of  the  reserve  deposit  law.  Perhaps  this  is  better  and 
easier  than  the  guarantee  capital  plan.  By  such  a  law 
a  new  company  is  compelled  to  deposit  with  the  state 
a  reserve  upon  its  policies  until  the  assets  have  reached 
a  certain  amount  when  the  deposit  may  be  withdrawn. 
In  at  least  two  of  the  middle  Western  states  mutual 
companies  have  been  successfully  formed  in  this  way. 
It  is  no  absolute  guarantee  against  failure,  for  the  state 
officials  have  not  always  been  careful  that  the  securities 
deposited  were  valuable,  but  with  able  supervision  the 
plan  ought  to  work. 

In  these  ways  mutual  companies  can  be  started.  Cap- 
ital need  not  be  attracted  by  the  great  rewards  of  the 
business,  and  the  danger  of  having  a  small  amount  of 
stock  later  control  large  assets  can  be  removed. 

However,  when  life  insurance  companies  are  made 
mutual  in  their  organisation,  grave  problems  still  re- 


204  CONTROL  OF  THE  ASSETS. 

main  to  be  solved.  In  fact  there  is  nothing  in  the  insur- 
ance business  to-day  calling  for  more  consideration  than 
the  question  of  securing  some  sound  system  of  control 
of  mutual  companies.  All  mutual  companies  are  organ- 
ised on  the  theory  of  control  by  the  policy-holders.  Each 
year  there  is  an  election  of  a  certain  number  of  trustees, 
and  it  is  the  assumption  that  the  men  chosen  hold  their 
positions  because  the  policy-holders  in  the  company  want 
them.  This  is  the  theory,  but  practically  mutual  com- 
panies have  not  been  run  in  this  way.  With  a  large 
membership  distributed  all  over  the  country,  the  impos- 
sibility of  personal  participation  in  the  selection  of 
officers  and  of  consideration  of  questions  and  methods 
affecting  the  organisation  has  led  to  a  resort  to  proxy 
voting.  This  has  placed  most  of  the  large  companies 
in  the  hands  of  a  few  individuals,  so  much  so  that 
policy-holders  have  almost  lost  sight  of  the  real  owner- 
ship of  the  accumulations  and  of  their  rights  in  the 
companies.  The  officials  by  reason  of  their  long  tenure 
in  office  have  looked  upon  their  company  and  its  man- 
agement as  a  matter  that  concerns  them  only  as  pro- 
prietors and  not  as  agents  responsible  for  their  acts. 
The  result  has  been  that  abuses  have  been  almost  as 
numerous  in  the  management  of  mutual  companies  as 
in  stock  companies. 

The  lack  of  interest  which  policy-holders  have  taken 
in  the  election  of  trustees  is  notorious.     Each  year  the 


CONTROL  OF  THE  ASSETS.  205 

notices  of  the  elections  are  advertised  in  the  daily  papers, 
or  notices  are  sent  out  in  other  ways,  but  the  policy- 
holder has  not  been  concerned.  So  generally  is  this 
true  that  the  story  is  told  of  a  policy-holder  who,  having 
received  the  notice  of  the  annual  election  in  a  company 
in  which  he  had  insured,  went  on  the  appointed  day  to 
cast  his  ballot.  Met  in  the  home  office  by  the  janitor 
and  stating  his  purpose,  he  was  informed  by  that  in- 
dividual that  no  election  was  being  held.  Insisting, 
however,  the  would-be  voter  finally  persuaded  the  jani- 
tor to  see  some  officer.  The  officials  of  the  company 
were  already  gathered  for  the  formality  of  the  annual 
election,  and  great  was  their  surprise  on  learning  that  a 
policy-holder  wished  to  vote.  After  considerable  de- 
liberation on  their  part  the  member  of  the  mutual  com- 
pany was  ushered  in  and  allowed  to  cast  his  ballot. 
Whether  this  particular  incident  is  authentic  or  not 
numerous  cases  of  apathy  on  the  part  of  the  policy-hold- 
ers can  be  cited.  In  1899,  one  hundred  and  seventeen 
votes  were  cast  for  the  trustees  of  the  New  York  Life, 
one  hundred  of  which  were  proxy  votes,  leaving  seven- 
teen to  be  cast  by  persons,  and  few  of  these  were  policy- 
holders not  connected  with  the  company  in  an  official 
capacity.  In  1905  despite  the  excitement  caused  by  the 
disclosures  in  certain  companies  early  in  the  year,  only 
twenty-eight  persons  voted  for  trustees  in  the  same 
company. 


206  CONTROL  OF  THE  ASSETS. 

Conspicuous  as  is  this  lack  of  interest  on  the  part  of 
policy-holders  it  is  not  difficult  to  explain.  Notwith- 
standing the  fact  that  every  policy-holder  has  a  vote 
which  he  can  cast,  in  actual  practice,  the  number  which 
can  be  interested  have  been  almost  powerless  to  ac- 
complish desired  results.  It  is  not  necessary  to  give 
many  examples  of  this.  In  1871,  there  was  an  at- 
tempted opposition  ticket  for  the  Mutual  Life  board, 
but  nearly  ten  thousand  proxies  were  held  by  the  officers 
and  the  attempt  accomplished  nothing.  Suppose  in 
1905,  a  considerable  number  of  policy-holders  instead 
of  twenty-eight  had  desired  to  effect  changes  in  the 
board  of  the  New  York  Life.  It  would  have  taken  a 
considerable  number  co-operating  together  to  have  ac- 
complished anything,  for  the  management  controlled 
twenty-five  thousand  proxy  votes.  If  these  proxies  had 
been  given  to  officers  because  that  many  men  believed  in 
the  policy  which  the  management  had  pursued  the  case 
would  not  have  been  so  bad,  but  too  often  the  proxy  is 
given  by  the  man  who  has  not  taken  the  trouble  to  in- 
form himself  and  gives  away  his  vote  because  he  is 
solicited.  The  management  of  the  company  has  a 
much  better  chance  to  gather  such  votes  than  does 
any  member  outside  of  it.  The  officers  have  a  com- 
plete list  of  the  policy-holders  and  an  organised 
agency  force.  The  individual  member  has  had  no  means 
of  interesting  any  great  number  of  his  fellow  members. 


CONTROL  OF  THE  ASSETS.  207 

Until  recently  he  has  no  access  to  their  names,  and  as 
was  said,  the  members  are  scattered,  and  even  the  op- 
position when  of  some  size  is  likely  to  have  many  diverg- 
ing opinions  as  to  what  policy  to  pursue. 

The  proxy  system  is  further  complicated  by  the  giv- 
ing of  proxies  often  for  long  periods.  In  some  in- 
stances, the  policy-holder  has  signed  a  proxy  before  he  is 
insured,  the  proxy  being  contained  in  the  application. 
When  proxies  are  given  thus  so  far  in  advance,  the 
policy-holder  sometimes  has  wished  to  vote  only  to  find 
that  he  has  already  surrendered  his  privilege. 

Whether  the  proxy  system  can  be  changed  so  as  to 
work  well  is  doubtful.  Under  present  conditions  it  is 
necessary,  for  without  it,  mutual  companies  would  be 
at  the  mercy  of  designing  schemers  who,  allured  by 
the  large  accumulations,  would  get  together  and,  gather- 
ing a  mere  handful  of  members  at  the  annual  elections, 
would  secure  the  control  of  the  companies.  That  this 
is  a  real  danger  is  amply  proven.  An  interesting  ex- 
ample of  it  is  afforded  by  the  experience  of  one  of  the 
mutual  companies  of  Connecticut.  A  number  of  men, 
needing  money  to  bolster  up  some  land  speculations  in 
which  they  had  engaged,  succeeded  in  getting  a  law 
passed  changing  the  mode  of  electing  the  trustees  of 
mutual  companies.  Simultaneously  they  scoured  the 
country  for  proxies  hoping  to  secure  enough  to  elect 
themselves  or  their  friends  to  the  controlling  position 


208  CONTROL  OF  THE  ASSETS. 

upon  the  board  of  one  company,  and  then  to  use  its 
funds  in  making  mortgage  loans  upon  the  land  which 
had  fallen  into  their  possession.  The  scheme  fortu- 
nately was  discovered  a  short  time  before  the  annual 
election  of  the  company  and  frustrated. 

The  states  have  done  something  to  prevent  the  abuse 
of  the  proxy  system.  These  attempts  have  in  the  main 
aimed  to  prevent  officers  from  maintaining  themselves 
in  office  by  intrenching  behind  a  wall  of  proxies  and  to 
prevent  any  one  from  obtaining  a  proxy  good  for  a  long 
period.  Massachusetts  has  a  good  law  to  obtain  these 
ends.  It  provides  that  "  members  may  vote  by  proxies 
dated  and  executed  within  three  months  and  returned 
and  executed  on  the  books  of  the  company  seven  days 
or  more  before  the  meeting  at  which  they  are  to  be  used. 
No  person  as  attorney  or  otherwise  shall  cast  more  than 
twenty  votes,  and  no  officer  by  himself  or  by  another 
shall  ask  for,  receive,  procure  to  be  obtained,  or  use  a 
proxy  vote."  1  A  number  of  other  states  have  some 
legislation  upon  the  subject,  but  their  provisions  are  in 
general  much  more  liberal  than  those  of  the  Massachu- 
setts law. 

If  all  the  states  having  important  life  insurance  in- 
terests were  to  place  the  above  restrictions  about  proxy 
voting,  no  doubt  much  good  would  result.  Especially 
would  this  be  true  if  it  would  be  found  possible  under 
1  Section  74,  Chapter  118,  Revised  Laws. 


CONTROL  OF  THE  ASSETS.  209 

certain  restrictions  to  give  policy-holders  the  privilege 
of  having  access  to  the  names  of  the  other  members  in 
their  company.  This  right  until  recently  has  been 
denied  because  of  the  abuses  which  it  is  claimed  would 
result  from  its  exercise.  Yet,  if  the  proxy  system  is  to 
succeed  even  moderately  well  such  a  privilege  must  be 
granted  to  policy-holders. 

However,  it  does  seem  that  the  present  system  of 
electing  trustees  of  mutual  companies  should  be  entirely 
changed.  It  is  a  system  taken  from  other  lines  of  busi- 
ness and  adapted  to  life  insurance  companies.  While  it 
might  be  expected  in  a  business  enterprise  in  which 
a  score  or  a  hundred  men  are  interested  as  shareholders 
that  these  men  can  most  readily  transact  their  busi- 
ness by  some  empowering  others  to  act  for  them  when 
they  are  not  at  the  meetings  of  such  stockholders,  we 
have  seen  that  there  is  little  ground  for  expecting  any 
such  satisfactory  results  from  governing  a  life  insurance 
company  in  the  same  way.  Life  insurance  on  the 
mutual  plan  is  not  a  business  enterprise  in  the  same 
sense  that  that  term  is  used  in  other  companies,  and 
thus  a  system  which  works  well  in  one  instance  does  not 
as  a  consequence  fit  the  situation  in  another. 

There  is  one  system  of  voting  for  trustees  which  has 

never  been  tried  in  this  country,  and  which  might  be 

successful.    It  is  impossible  for  policy-holders  to  travel 

many  miles  for  the  purpose  of  casting  their  ballots  in 

14 


210  CONTROL  OF  THE  ASSETS. 

person,  but  it  is  possible  that  their  will  could  be  obtained 
on  all  important  questions  by  mail,  and  especially  as  to 
whom  they  will  have  to  manage  their  companies.1  The 
objection  to  the  plan  which  is  met  most  frequently  is 
the  reputed  heavy  task  of  verifying  the  signatures  of  the 
voters.  How  this  would  be  any  more  difficult  than  to 
do  the  same  for  the  proxies  is  difficult  to  say.  That 
the  scheme  is  feasible  is  proven  by  the  experience  of  the 
Australasian  Mutual  Provident  Society  which  has  used 
this  method  for  years.  The  system  is  economical  and 
it  causes  the  members  to  take  great  interest  in  the  com- 
pany. If  it  could  be  adopted  with  the  same  success  in 
this  country  it  would  be  a  great  improvement  over  the 
systems  now  in  use  and  the  apathy  which  they  produce 
among  policy-holders. 

This  problem  of  the  management  of  companies  by 
their  policy-holders  has  been  discussed  at  length  in  a 
study  of  the  investments  because  while  our  study  is  one 
of  investment  of  assets  it  is  the  assets  which  make  the 
control  of  a  company  so  much  sought  after.  It  is  not 
sufficient  to  remedy  abuses  which  have  occurred  so  fre- 
quently in  the  past  that  restrictions  be  placed  upon  the 
officers  and  penalties  be  inflicted  when  they  are  over- 
stepped, or  that  directors  be  held  responsible  for  the 

*  Mr.  M.  M.  Dawson  has  urged  this  scheme  in  his  "  Principles 
of  Life  Insurance  Legislation  "  and  in  other  publications.  Nu- 
merous others  have  endorsed  the  plan. 


CONTROL  OF  THE  ASSETS.  211 

proper  management  of  the  investments,  the  policy-hold- 
ers in  a  mutual  company  have  a  duty.  Many  of  these 
policy-holders  are  men  of  wealth  and  influence,  and  if 
they  object  to  the  practices  of  the  insurance  companies 
let  them  say  so.  They  have  felt  that  they  were  power- 
less under  the  present  system  unless  some  great  evils 
have  been  exposed  causing  a  wave  of  indignation  among 
the  policy-holders  which  resulted  in  some  concerted  ac- 
tion. But  they  have  also  been  negligent.  For  the  de- 
parture of  the  companies  from  sound  methods  this  lack 
of  interest  on  the  part  of  credulous  and  indiscriminat- 
ing  policy-holders  is  equally  as  blamable  as  the  officers 
and  directors. 

If  the  recommendations  which  have  been  made  in  this 
chapter  were  carried  out,  it  is  believed  that  much  that 
is  mischievous  in  insurance  management  would  be  re- 
moved. It  would  be  better  that  legislation  follow  the 
direction  here  indicated  than  to  attempt  to  place  strict 
regulations  upon  the  investments.  A  right  sense  of  re- 
sponsibility intelligently  applied  is  better  than  legal 
enactment.  It  is  the  duty  of  the  state  to  find  out  pre- 
cisely what  the  management  of  a  company  is  doing,  and 
to  publish  the  facts  which  it  learns.  If  this  were  done, 
and  if  the  policy-holders  had  an  easy  and  effective 
method,  such  as  has  been  suggested,  of  expressing  their 
will,  most  officers  of  insurance  companies  would  be  de- 
terred from  wrong-doing  and  those  that  were  not  would 


212  CONTROL  OF  THE  ASSETS. 

be  quickly  replaced.  How  state  legislatures  are  going 
to  run  the  business  of  life  insurance  companies  better  by 
regulating  investments,  ratio  of  expenses,  new  business 
and  other  details  is  difficult  to  understand.  It  is  safe 
to  surmise  that  evils  just  as  great  will  result  as  those 
which  such  legislation  tends  to  eliminate.  Under  the 
recommendations  which  have  been  here  made,  able  of- 
ficers would  be  allowed  to  make  the  best  investments  of 
the  funds  of  the  policy-holders  and  the  danger  of  an 
improper  use  of  the  assets  would  be  largely  abolished. 
Some  more  laws  defining  responsibility  are  needed, 
policy-holders  should  be  placed  in  power,  and  severe 
penalties  should  be  imposed  for  the  non-observance  of 
laws,  but  further  than  this  not  much  can  be  accom- 
plished by  legislation. 


CHAPTEK   VIII. 

TAXATION  OF  INSURANCE  FUNDS. 

In  the  conduct  of  the  business  of  life  insurance,  taxa- 
tion has  played  an  important  part.  Many  different 
kinds  of  taxes  have  been  imposed  and  even  yet  no  well- 
defined  principles  of  taxing  the  business  have  emerged 
from  the  confused  mass  of  legislation  upon  the  subject. 
The  reason  for  the  confusion  is  not  difficult  to  find.  The 
whole  system  of  taxation  in  the  various  states  has  as  a 
rule  been  exceedingly  bad.  Property  of  every  descrip- 
tion has  been  taxed,  and  corporation  taxes  have  been 
grafted  upon  the  general  property  tax.  Many  reforms 
in  the  system  of  taxation  are  yet  to  be  made.  The  prob- 
lem of  how  to  tax  corporations  so  that  they  will  bear 
their  share  of  the  public  burden  has  hardly  had  a  fair 
beginning  at  its  solution.  In  the  case  of  insurance 
companies,  the  question  of  taxation  has  been  further 
complicated  by  the  widespread  ignorance  of  the  plan  of 
life  insurance  and  the  purpose  of  its  accumulated  funds. 
It  is  not  strange  in  view  of  the  fact  that  the  problem 

of  taxing  corporations  which  are  engaged  in  trade  and 

213 


214  TAXATION  OF  INSURANCE  FUNDS. 

transportation  has  not  been  solved  that  much  confusion 
has  prevailed  in  the  taxation  of  insurance  companies. 
Legislators  have  seen  these  companies  accumulating 
large  funds,  apparently  growing  tremendously  rich, 
therefore,  they  have  imposed  taxes  upon  them. 

Before  attempting  to  discuss  what  should  be  the 
principle  of  life  insurance  taxation,  it  will  be  well  to 
see  just  what  taxes  have  been  levied  on  the  business. 
In  this  rapid  survey  of  these  laws,  those  which  imposed 
taxes  upon  gross  and  net  premiums  will  be  included 
along  with  those  levying  direct  taxes  upon  the  assets,  for 
while  the  latter  is  imposed  by  the  home  state,  the 
former  taxes  have  been  inspired  by  the  desire  to  tax 
assets  of  companies  which  were  without  the  state. 

New  York  was  one  of  the  first  states  to  impose  a  tax 
specifically  upon  life  insurance  corporations.  In  1853, 
a  tax  of  two  per  cent,  was  levied  upon  the  annual  gross 
premiums  on  the  New  York  business  of  companies  or- 
ganised outside  the  State.1  Two  years  later  it  was  en- 
acted by  the  same  State  that  home  mutual  companies 
should  pay  a  tax  on  $100,000  of  personal  property.2 
In  1857  New  York  imposed  one  of  the  first  taxes  on 
assets.  Foreign  corporations,  that  is,  those  outside  of 
the  United  States,  had  been  compelled  to  make  a  de- 
posit in  New  York,  and  in  the  above  mentioned  year, 

*  Section  15,  Chapter  463,  Laws  of  1853. 
3  Chapter  83,  Laws  of  1855. 


TAX  A  T10N  OF  INS  URANCE  FUNDS.  215 

it  was  provided  that  these  deposits  should  be  taxed  as 
other  property.1 

Ohio  in  1859  enacted  that  the  personal  property  and 
assets  of  the  life  companies  in  that  state  should  be  taxed 
in  the  same  manner  as  if  belonging  to  individuals,  and 
annual  gross  premiums  of  outside  companies  were  to  be 
taxed  in  the  same  manner.2  In  1862,  Massachusetts 
and  Connecticut  adopted  the  principle  of  taxing  the 
accumulations  of  their  companies,  a  plan  which  the 
latter  has  pursued  consistently  to  the  present  time. 
Massachusetts  levied  a  tax  of  one-third  of  one  per  cent, 
on  the  funds  of  the  Hospital  Life,  then  still  doing  a 
small  life  business,3  and  Connecticut  imposed  a  tax  of 
one-half  of  one  per  cent,  on  the  total  capital  of  mutual 
companies  in  that  State.4 

Two  years  later  the  taxation  of  assets  appeared  in 
an  unexpected  quarter.  Kentucky  in  that  year  provided 
that  the  assets  of  companies  in  that  State  should  be 
taxed  at  the  same  rate  as  was  real  estate,  and  companies 
outside  of  Kentucky  should  pay  a  tax  of  five  per  cent, 
on  the  gross  premiums  collected  in  Kentucky.5  In 
1867,  Connecticut  raised  the  tax  to  three-quarters  of 
one  per  cent,  on  all  the  assets  except  real  estate  of  her 

i  Section  1,  Act  of  April  16,  1857. 
2  Section  16,  Act  of  April  5,  1859. 
8  Section  3,  Chapter  224,  Laws  of  1862. 

*  Section  6,  Act  of  June  18,  1862. 

*  Section  5,  Chapter  478,  Laws  of  1864. 


216  TAXATION  OF  INSURANCE  FUNDS. 

mutual  companies.  Even  real  estate  was  to  be  included 
when  it  was  not  situated  in  Connecticut,  and  if  in  that 
State  was  to  be  taxed  by  the  local  government  units.1 

Delaware  in  1869  devised  a  new  plan  of  taxing  her 
companies.  In  a  law  of  that  year,  the  companies  or- 
ganised in  Delaware  were  compelled  to  pay  an  annual 
tax  to  the  state  of  one  and  one-half  per  cent,  of  gross 
income  received  from  premiums  wherever  collected  and 
from  investments  wherever  made.2  Outside  companies 
were  taxed  two  and  one-half  per  cent,  on  gross  premiums 
on  Delaware  business. 

It  is  thus  seen  that  a  number  of  states  having  insur- 
ance companies  of  their  own  were  taxing  their  gross 
assets.  To  protect  these  companies  against  injury  by 
the  tax  in  the  competition  with  outside  companies,  a 
tax  could  not  be  levied  on  the  assets  of  the  out  of  state 
corporations,  but  their  premiums  could  be  levied  upon 
and  the  same  result  obtained,  and  thus  along  with  the 
tax  on  assets  went  the  tax  on  premiums  of  foreign  com- 
panies. Now  it  was  perfectly  natural  that  when  one 
state  having  companies  of  its  own  had  levied  a  premium 
tax  on  companies  from  other  states  that  those  states 
should  retaliate  by  levying  taxes  upon  the  premiums 
collected  by  the  companies  of  the  first  state,  and  that 
is  exactly  what  was  done.     Those  states  having  no  com- 

i  Act  of  July  27,  1867. 

2  Section  2,  Act  of  April  9,  1869. 


TAXATION  OF  INSURANCE  FUNDS.  217 

panies  of  their  own,  but  seeing  the  revenue  which  other 
states  were  obtaining  from  the  tax  on  premiums  were 
led  to  impose  such  a  tax  themselves. 

One  other  cause  of  the  popularity  of  the  premium 
tax  must  not  be  overlooked.  The  large  and  successful 
companies  at  this  time  were  practically  all  in  the  East. 
We  have  seen  how  that  State  having  the  largest  com- 
panies attempted  to  keep  most  of  the  assets  confined  to 
home  investments.  Certain  sections  of  the  West  needed 
capital  very  much  and  looked  upon  the  drains  made  by 
the  insurance  companies  as  a  loss.  Not  only  did  some 
of  these  states  attempt  to  make  it  obligatory  upon  out- 
side companies  to  invest  the  reserves  in  the  state  where 
they  originated,  but  they  attempted  to  build  up  home 
companies  by  imposing  a  discriminating  tax  on  out  of 
state  companies. 

Thus  by  1870,  while  only  a  half  dozen  states  were 
taxing  assets  directly,  no  less  than  twenty-two  were  levy- 
ing a  tax  of  from  one  to  five  per  cent,  on  gross  premiums. 

Since  1870,  the  situation  in  regard  to  insurance  tax- 
ation has  changed  only  slightly.  Connecticut  in  1872 
reduced  the  tax  on  assets  from  three-fourths  to  one-half 
of  one  per  cent.,1  and  in  1883,  it  was  further  reduced  to 
one-quarter  of  one  per  cent.2  New  York  which  had  been 
favorable  to  her  companies  since  the  inception  of  the 

1  Section  1,  Chapter  88,  Laws  of  1872. 

2  Section  3,  Act  of  April  1,  1881. 


218  TAXATION  OF  INSURANCE  FUNDS. 

business  in  the  matter  of  taxation  imposed  a  tax  of  one 
per  cent,  upon  the  income  received  from  investments 
represented  by,  or  based  upon  property  situated  in  New 
York  State.1  Fortunately  for  the  interests  of  that  State, 
this  unwise  measure  of  the  Assembly  was  never  enforced 
owing  to  a  small  technicality  in  the  law.  If  it  had  been 
enforced  it  would  have  driven  the  investments  of  the 
large  companies  in  that  State  to  outside  securities,  and 
New  York  would  have  been  deprived  of  that  aid  which 
her  insurance  companies  have  always  given. 

It  was  about  1880  that  the  tax  on  assets  became  most 
popular.  In  the  same  year  that  the  New  York  act  was 
passed,  Massachusetts  levied  a  tax  of  one-half  of  one  per 
cent,  upon  the  aggregate  net  value  of  all  the  policies  in 
force  in  her  companies.  It  was  realised  before  the  law 
had  been  in  force  a  year  that  it  was  unjust,  and  the  next 
year  it  was  reduced  to  one-quarter  of  one  per  cent.,  and 
subsequently  it  was  removed  entirely. 

In  1898,  the  Legislature  of  Wisconsin  passed  a  law 
imposing  a  tax  burden  upon  her  life  insurance  com- 
panies exceedingly  heavy.  They  are  to  pay  three  per 
cent,  of  their  gross  income  from  all  sources,  except  from 
real  estate  upon  which  they  otherwise  are  taxed  and  ex- 
cepting premiums  collected  outside  the  state  of  Wiscon- 


1  Laws  of  1880. 

2  Section  1220,  Statutes  of  1898,  as  amended  in  1899  and  1901. 


TAXATION  OF  INSURANCE  FUNDS.  219 

Virginia  in  the  comprehensive  revision  of  her  tax 
laws  in  1902-3  levied  a  tax  upon  the  assets  of  life  insur- 
ance companies.  The  real  and  personal  property  of 
every  company  is  now  taxed  at  the  rate  of  thirty-five 
cents  a  hundred.  Besides  this  a  license  fee  of  two  hun- 
dred dollars  is  exacted  and  a  tax  of  one  per  cent,  on 
gross  premiums  is  imposed.1 

At  the  present  time  four  states  are  taxing  gross  assets 
or  the  income  from  gross  assets.  Michigan,  Missouri 
and  Vermont  tax  the  net  assets,  or  the  surplus  of  their 
home  companies.  Massachusetts,  Minnesota,  and  Tenn- 
essee among  others  have  a  fee  for  the  valuation  of 
policies  which  in  reality  amounts  to  a  considerable  tax. 
A  dozen  states  tax  the  gross  premiums  of  their  home 
companies,  in  a  number  of  cases  no  matter  where  the 
premiums  are  collected.  Three  levy  on  net  premiums, 
and  several  tax  the  premiums  collected  by  home  as  well 
as  foreign  companies  as  personal  property  of  the  agent 
collecting  them  or  of  the  company  to  which  they  are 
sent.  More  than  two-thirds  of  the  states  have  taxes 
upon  gross  or  net  premiums  collected  within  their 
boundaries  by  outside  companies.  Besides  these  taxes 
on  assets  and  on  gross  and  net  premiums  by  home  states 
and  by  other  states  in  which  the  companies  are  doing 
business,  there  are  a  large  number  of  license  fees  and 
various  other  charges  which  the  companies  have  to  pay. 
i  Section  23,  Act  of  April  16,  1903. 


220  TAXATION  OF  INSURANCE  FUNDS. 

These  charges  are  usually  small,  but  in  the  aggregate 
they  constitute  a  considerable  burden  upon  the  business. 
In  nearly  every  state  the  insurance  department  is  more 
than  sustained  by  the  fees  which  it  receives. 

The  effect  of  these  taxes  upon  particular  companies 
and  upon  the  states  which  have  levied  them  will  be  con- 
sidered later.  However,  it  should  be  said  in  passing 
that  the  annual  tax  burden  upon  life  insurance  com- 
panies is  not  far  from  ten  million  dollars. 

Needless  to  say  there  has  been  much  opposition  to  the 
above  taxes.  While  this  opposition  has  been  justifiable, 
the  grounds  on  which  it  has  been  built  have  not  always 
been  sound.  Those  interested  in  the  welfare  of  the  sys- 
tem of  life  insurance  have  attempted  to  excite  a  senti- 
mental feeling  against  the  laws,  and  in  doing  so  they 
have  not  always  used  sound  arguments.  One  of  the 
most  common  reasons  that  have  been  urged  against  the 
taxation  of  insurance  assets  has  been  that  these  assets 
are  a  provision  laid  up  by  provident  people  for  the  fu- 
ture. Undoubtedly  this  is  true.  But  all  capital  is  a 
provision  for  the  future,  and  in  attempting  to  differen- 
tiate insurance  savings  from  other  savings,  the  oppon- 
ents of  taxation  have  not  succeeded  in  establishing  their 
point. 

Again  it  is  usually  argued  that  a  tax  upon  insurance 
is  a  tax  upon  a  tax.  The  claim  is  made  that  the  pre- 
mium paid  for  insurance  is  in  itself  a  tax  for  the  relief 


TAXATION  OF  INSURANCE  FUNDS.  221 

of  distress  and  misfortune,  and  that  the  state  in  levying 
upon  these  premiums  or  upon  the  assets  increases  the 
burden  of  an  already  existing  tax.  By  imposing  the  tax, 
the  state  adds  just  to  the  extent  of  the  tax  to  the  cost 
to  the  members  of  an  insurance  company  of  making 
losses  good  to  the  individual  who  has  suffered.  There- 
fore, this  tax  exacted  by  the  state,  it  is  urged,  is  an  in- 
justice and  as  such  should  be  abolished.  •  This  argument 
overlooks  one  condition  which  is  necessary.  We  might 
imagine  a  community  in  which  every  citizen  carries  in- 
surance on  his  life  in  proportion  to  its  value.  In  such 
a  condition  of  society  the  premium  would  be  a  tax  which 
each  citizen  would  pay  in  proportion  to  the  value  of 
his  life  to  provide  a  fund  for  the  payment  of  losses  to 
any  member  of  the  community,  and  a  tax  upon  insur- 
ance would  be  a  tax  upon  a  tax.  However,  when  only 
a  small  proportion  of  the  community  carry  insurance, 
the  payment  of  the  annual  premiums  cannot  be  consid- 
ered as  a  tax,  for  a  tax  is  exacted  with  some  regard  to 
equality  in  its  effects.  As  long  as  some  men  make  pro- 
vision for  the  catastrophe  of  sudden  termination  of  earn- 
ing power  in  other  ways  than  by  insurance,  or  no  pro- 
vision at  all,  so  long  can  a  tax  upon  insurance  not  be 
considered  as  a  tax  upon  a  tax. 

However,  there  are  vital  objections  to  the  policy  of 
taxing  the  insurance  business.  It  must  be  admitted 
though  that  many  of  these  objections  do  not  apply  only 


222  TAXATION  OF  INSURANCE  FUNDS. 

to  life  insurance  taxation,  but  to  many  other  taxes  which 
are  now  levied.  Take  the  case  of  taxing  assets  with 
which  we  are  primarily  interested.  It  is  a  fact  that 
most  states  tax  bonds,  stocks,  notes,  and  cash  when  they 
are  held  by  private  citizens  and  the  question  imme- 
diately arises  why  should  they  not  be  taxed  when  held  by 
a  group  of  individuals  when  associated  together  in  an 
insurance  company.  Even  a  considerable  number  of 
states  tax  mortgage  loans  when  made  by  individuals,  and 
when  this  is  done,  those  individuals  cannot  be  persuaded 
but  that  the  same  sort  of  securities  should  be  taxed  when 
in  the  possession  of  insurance  corporations.  If  taxed  in 
one  instance,  they  should  be  taxed  in  the  other,  but  if 
the  whole  system  of  taxation  were  worked  out  on  better 
principles,  such  assets  would  not  be  taxed  no  matter  by 
whom  owned. 

Any  one  who  has  made  even  a  casual  study  of  taxation 
in  the  United  States  realises  how  difficult  is  the  solution 
of  the  problems  found  in  that  field.  Many  of  these 
problems  are  wellnigh  insoluble  because  of  the  various 
units  into  which  the  country  is  divided,  and  because  of 
the  interstate  character  of  much  of  the  business  of  vari- 
ous corporations.  The  result  of  having  many  independ- 
ent governmental  units  has  been  much  double  taxation. 
Thus  a  corporation  is  frequently  taxed  upon  all  its 
wealth  in  one  state,  and  then,  if  its  bonds  and  stocks  are 
owned  in  another  state,  they  are  taxed  by  that  state,  and 
even  not  infrequently  are  they  taxed  when  owned  in  the 


TAXATION  OF  INSURANCE  FUNDS.  223 

same  state  where  the  corporation  is  located.  An  appli- 
cation of  this  principle  of  taxation  is  found  in  Massachu- 
setts, which  in  most  respects  has  had  good  legislation. 
This  state  taxes  the  securities  of  corporations  located  in 
Massachusetts  no  matter  where  owned,  and  also  taxes 
the  securities  of  corporations  located  without  the  state 
which  are  owned  by  Massachusetts  citizens.  If  the 
other  commonwealths  had  the  same  law,  to  which  Mass- 
achusetts could  not  deny  their  right,  there  would  be 
double  taxation  of  all  securities  owned  outside  of  the 
states  chartering  the  corporations. 

Without  going  into  any  elaborate  discussion  of 
remedies  for  the  present  methods  of  taxation,  there  is 
one  which  would  solve  most  of  the  difficulties  of  double 
taxation.  Let  the  states  give  up  the  plan  of  taxing 
wealth,  and  at  the  same  time  evidences  of  ownership 
in  that  wealth.  They  do  not  tax  an  individual  who  pos- 
sesses a  deed  for  real  estate  located  in  other  states.  Then 
why  tax  the  stocks  of  a  corporation  located  outside  the 
state  ?  These  are  not  wealth,  they  are  evidences  of  own- 
ership just  as  is  the  deed  to  the  real  estate,  and  if  it  is 
right  that  the  deed  should  be  exempted,  it  is  right  that 
the  stocks  should  not  be  taxed.  It  would  be  best  to  ex- 
empt both,  for  in  no  other  way  can  double  taxation  be 
prevented.1 

1  For  a  more  elaborate  discussion  on  this  point  see  Irving 
Fisher,  "  The  Nature  of  Capital  and  Income,"  Chapter  2.  Mac- 
millan  and  Co.,  1906. 


I 


224  TAXATION  OF  INSUBANCE  FUNDS. 

That  mortgages  should  not  be  taxed  has  often  been 
demonstrated  by  experience.  A  loan  upon  real  estate 
does  not  create  any  new  wealth,  and  to  tax  both  the 
real  estate  and  the  mortgage  is  double  taxation.  It  has 
been  found  that  the  borrower  gains  when  the  tax  is 
placed  upon  the  real  estate,  and  when  no  attempt  is 
made  to  levy  upon  the  mortgage.  Bonds  of  corporations 
are  similar  to  mortgages,  and  though  the  effect  of  tax- 
ing them  to  the  holders  has  not  been  seen  so  clearly  as 
in  the  case  of  mortgages,  yet  the  same  principle  applies 
to  both,  and  neither  form  of  loan  should  be  taxed. 

All  this  bears  directly  upon  the  taxation  of  insur- 
ance companies.  If  the  states  would  tax  corporations 
upon  their  wealth  where  it  is  located,  and  not  attempt 
to  tax  the  multitude  of  holders  of  corporation  securities, 
and  would  tax  real  estate  and  not  the  mortgage  upon  it, 
if  all  this  were  done,  then  insurance  assets  would  not 
be  taxed,  for  they  consist,  as  we  have  seen,  of  mortgages, 
bonds,  and  stocks.  Thus  if  the  above  principle  of  tax- 
ation were  adopted,  the  problem  of  taxing  insurance 
companies  upon  their  assets  would  be  solved.  The  ob- 
jection to  taxing  these  assets  is  not  that  they  belong  to 
companies  which  have  the  worthy  object  of  relieving 
distress,  but  that  such  a  tax  should  not  be  levied  on  the 
kind  of  assets  which  they  possess  no  matter  to  whom 
they  belong. 

Not  only  does  the  taxation  of  insurance  assets  by  the 


TAXATION  OF  INSURANCE  FUNDS.  225 

state  where  the  company  is  located  result  in  much  double 
taxation,  it  is  peculiarly  unjust  as  it  levies  a  tax  on 
wealth  which  is  without  the  state  and  owned  by  citizens 
without  the  state.  !No  successful  insurance  company 
has  gathered  its  assets  even  for  the  most  part  from  the 
savings  of  citizens  within  the  state  where  it  is  located, 
savings  have  flowed  into  it  from  every  part  of  the  coun- 
try, these  to  be  held,  invested  and  accumulated  at  in- 
terest, and  yet  the  state  in  which  the  company  is  located 
claims  the  right  to  tax  all  these  savings  even  if  they 
do  belong  to  citizens  without  the  state.  An  insurance 
company  must  have  a  habitat  in  some  state,  but  the  fact 
that  some  one  state  is  fortunate  enough  to  have  a  suc- 
cessful company  established  within  its  boundaries  does 
not  give  it  the  moral  right  to  tax  all  the  assets  whichv 
that  company  possesses.  If  those  states  with  companies 
doing  business  throughout  the  country  are  going  to  con- 
tinue the  taxation  of  property  rights  of  persons,  and 
thus  those  possessed  by  their  insurance  companies,  they 
should  be  consistent  at  least  and  tax  only  that  portion  of 
the  assets  which  belong  to  citizens  of  their  states,  leav- 
ing to  other  states  the  right  to  do  as  they  please  with  the 
portions  belonging  to  their  citizens,  but  which  for  the 
time  being  happen  to  be  stored  away  in  the  vaults  of 
the  home  office  in  another  state. 

If  the  above  objections  to  the  taxation  of  insurance 
companies  by  the  state  in  which  they  are  located  do  not 
'5 


226  TAXATION  OF  INSURANCE  FUNDS. 

appeal  to  the  lawmakers  of  that  commonwealth,  there  is 
an  objection  which  will.  No  one  can  doubt  the  value 
of  a  successful  life  insurance  company  to  a  state  through 
the  free  (i.  e.  loanable)  capital  which  such  a  company 
is  constantly  bringing  to  a  state.  Whether  the  state 
forces  the  company  to  invest  in  home  securities  or  not, 
there  will  always  be  a  tendency  for  a  large  portion  of 
the  funds  to  be  invested  in  the  home  state.  Other  things 
being  equal,  the  finance  committee  of  a  life  insurance 
company  would  rather  invest  its  funds  in  enterprises 
with  which  they  are  familiar  than  of  those  further  away. 
Many  of  the  barriers  to  an  easy  flow  of  capital  have 
fortunately  been  broken  down,  but  it  is  doubtful  if 
capital  will  ever  become  completely  mobile.  Therefore 
it  is  of  great  importance  to  the  financial  interests  in  a 
state  that  it  have  insurance  companies  which  are  con- 
stantly bringing  in  capital.  If  this  is  true,  then  the 
legislators  of  a  state  should  hesitate  long  before  placing 
any  burden  upon  their  companies  which  will  hinder 
their  legitimate  growth.  By  levying  a  tax  upon  the 
companies  which  it  has  created,  a  state  may  handicap 
them  greatly  in  the  competition  with  companies  from 
states  which  are  not  so  taxed.  As  a  result,  their  assets 
accumulate  slowly  in  comparison  with  other  companies 
and  the  loss  to  the  state  of  financial  resources  may  more 
than  offset  the  gain  in  revenue  from  the  tax. 

It  is  impossible  to  point  to  the  companies  of  any 


TAXATION  OF  INSURANCE  FUNDS.  227 

state  and  say  their  growth  has  been  retarded  by  the 
taxes  which  have  been  imposed  upon  them.  We  can  say, 
however,  with  considerable  assurance,  that  the  tax  bur- 
den has  had  a  serious  effect.  Take  the  case  of  the  Con- 
necticut companies  which  have  been  taxed  on  assets  now 
for  more  than  thirty  years.  There  is  reason  to  believe 
that  these  companies  have,  in  general,  been  ably  man- 
aged. They  got  a  good  start  and  an  early  one,  why  did 
they  begin  to  fall  behind  three  decades  ago?  The  fol- 
lowing table  throws  light  upon  the  situation. 

Total  Taxes  Paid  by  Eight  Selected  Companies  for 
the  Ten  Years,  1871-1880 : 


Company. 

Rate  per  $1000  of  Mean 
Annual  Assets. 

Aetna 

$5.26 

Phoenix 

5.59 

Connecticut  Mutual 

Northwestern 

Mutual  Life 

7.22 
2.01 
2.05 

Equitable 

2.67 

Mutual  Benefit 

2.72 

New  York  Life 

2.05 

The  heavy  taxes  of  the  Connecticut  companies  de- 
creased their  dividend-paying  power,  and  it  is  the  divi- 
dends by  which  policy-holders  measure  the  companies. 
Since  1882,  when  the  tax  on  assets  in  Connecticut  was 
cut  to  one-half  of  its  previous  amount,  the  difference  in 


228  TAXATION  OF  INSURANCE  FUNDS. 

burden  upon  Connecticut  companies  and  those  of  other 
states  has  somewhat  diminished,  but  through  the  whole 
period  the  tax  has  been  heavy.  If  the  tax  did  contribute 
largely  to  checking  the  growth  of  the  Connecticut  com- 
panies, it  is  a  fair  question  whether  the  increased 
amount  of  capital  which  otherwise  would  have  come  to 
the  State  would  not  have  been  of  more  general  benefit 
to  the  State  than  the  revenue  which  has  been  secured  by 
taxing  the  insurance  business. 

Kentucky  is  a  state  which  has  taxed  its  own  com- 
panies heavily,  taxing  assets  at  property  rates.  The  law 
has  defeated  its  own  ends,  for  life  insurance  companies 
have  not  thrived  at  all  in  that  State,  and  hence,  not  only 
is  the  State  deprived  of  the  financial  assistance  of  in- 
surance accumulations,  but  no  revenue  is  produced.  It 
would  be  rash  to  say  that  the  tax  on  assets  was  the  only 
cause  of  the  failure  of  insurance  companies  in  Ken- 
tucky, but  it  is  a  sufficient  cause,  and  the  one  given  for 
the  reinsurance  of  a  promising  company  in  that  State  a 
few  years  ago. 

Thus,  taxation  of  insurance  assets  is  a  mistaken  policy 
for  a  state  to  pursue.  First,  such  a  policy  is  wrong  in 
principle,  for  it  results  in  double  taxation ;  secondly,  it 
violates  our  sense  of  justice,  for  its  taxes  assets  really 
belonging  to  persons  outside  the  state;  and  lastly  it  is 
an  inexpedient  policy,  if  the  tax  is  made  so  onerous  as 
to  check  the  growth  of  the  insurance  companies. 


TAXATION  OF  INSURANCE  FUNDS.  229 

Many  of  the  objections  which  have  been  made  to  the 
policy  of  taxing  insurance  companies'  assets  apply  with 
equal  force  to  the  taxation  of  premiums.  For  the  most 
part  these  taxes  have  been  levied  on  the  premiums  paid 
by  citizens  of  one  state  to  companies  of  another.  What 
is  the  justification  of  such  taxes  ?  In  the  first  place,  it 
is  said  that  such  taxes  should  be  levied  because  the  com- 
panies have  large  assets,  some  of  which  belong  to  people 
in  the  state  levying  the  premium  tax,  and  since  these 
assets  cannot  be  reached  for  purposes  of  revenue,  the 
state  must  have  recourse  to  the  premium  tax.  In  reply 
to  this,  it  is  obvious  that  if  the  state  where  the  assets 
are  located  should  not  tax  them,  then  no  other  state 
should  attempt  to  do  so. 

Again  taxes  on  premiums  are  advocated  on  the  ground 
that  they  are  necessary  to  secure  justice  among  the  citi- 
zens of  a  state.  Suppose,  it  is  argued,  that  there  are 
two  men  in  the  same  locality  who  have  equal  earning 
power  and  that  each  saves  the  same  amount  of  his  earn- 
ings. One  of  these  men  does  not  feel  the  necessity  of 
insuring  his  life,  and  with  his  savings  buys  bonds  or 
stocks  of  some  corporation.  The  other  buys  a  level 
premium  life  insurance  policy.  Since  the  man  who 
buys  bonds  or  stocks  is  usually  taxed,  the  advocates  of 
premium  taxation  claim  that  the  man  who  buys  insur- 
ance should  also  be  taxed.  There  is  some  truth  in  this 
claim   especially   when   endowment    policies   are    pur- 


230  TAXATION  OF  INSURANCE  FUNDS. 

chased,  but  under  the  system  of  taxation  which  we  have 
advocated,  neither  man  should  be  taxed.  The  purchaser 
of  stocks  should  be  taxed  only  once  and  then  through 
the  corporation,  and  so  far  as  the  man  who  buys  insur- 
ance is  laying  up  capital,  it  is  invested  in  the  same  se- 
curities and  thus  would  be  taxed  in  the  same  manner  as 
the  other  man's  investment.  To  levy  a  tax  upon  each 
one  again  is  double  taxation. 

Even  if  a  state  decides  that  premiums  must  be  taxed 
in  order  that  justice  be  done  to  all  its  citizens,  it  does 
not  follow  that  it  has  a  right  to  collect  the  tax  from  the 
insurance  companies.  The  companies  have  a  fixed  con- 
tract with  their  policy-holders.  The  annual  premium  is 
determined  when  the  contract  is  entered  into,  and  it  can- 
not be  increased  by  the  company  no  matter  how  urgent 
are  its  needs.  When  a  state  levies  an  extremely  heavy 
tax  upon  premiums,  the  life  insurance  company  cannot 
return  the  reserve  upon  its  policies  in  that  state,  thus 
terminating  its  contracts  and  in  this  way  avoid  the  tax. 
The  state  demands  that  the  contracts  be  carried  out  to 
the  stipulated  time  and  for  the  amounts  previously 
agreed  upon,  yet  at'  the  same  time  assumes  the  right  to 
exact  payments  from  the  companies  which  may  imperil 
their  ability  to  carry  out  their  obligations.  This  is  un- 
just in  principle,  and  if  taxes  are  to  be  levied  upon  the 
insurance  business,  the  right  should  be  given  to  the 
companies  to  increase  their  premiums  proportionately 


TAXATION  OF  INSURANCE  FUNDS.  231 

to  the  tax,  or  better,  the  tax  should  be  imposed  upon  the 
policy-holder  directly. 

We  conclude  then  that  taxation  of  life  insurance 
assets  and  premiums  is  wrong.  If  it  is  wrong,  the  taxes 
should  not  be  levied.  Life  insurance  is  not  a  business 
which  requires  repressive  measures  in  the  way  of  penal- 
ties for  its  continuance.  The  beneficent  characteristics 
of  life  insurance  are  so  well  understood  in  most  coun- 
tries that  the  companies  carrying  on  the  business  in 
them  have  been  fostered  and  protected  and  not  in  general 
been  burdened  by  heavy  taxation.  In  England  the  com- 
panies have  to  pay  the  income  tax  on  investments,  but 
this  corresponds  to  our  corporation  tax  and  is  not  a 
second  tax  upon  assets.  In  striking  contrast  to  the 
almost  universal  premium  tax  in  this  country,  England 
does  not  levy  such  a  tax,  but  rather  offers  a  reward  for 
saving  in  this  direction.  Each  policy-holder  who  is 
liable  to  the  income  tax  is  allowed  to  deduct  in  his  re- 
turn the  amount  of  premiums  paid  by  him  on  life  in- 
surance policies  up  to  the  extent  of  one-sixth  of  his  in- 
come.1 Holland  in  the  laws  in  the  early  nineties  which 
introduced  the  taxation  of  capital  and  of  income  in  that 
country  particularly  favored  life  insurance.  In  the 
law  imposing  a  tax  upon  capital,  life  insurance  policies 
were  exempted  from  taxation,  and  the  income  tax  law 
allows  life  insurance  premiums  up  to  an  amount  of  forty 
1  Statute  16  and  17  Victoria. 


232  TAXATION  OF  INSURANCE  FUNDS. 

dollars  to  be  deducted  from  the  income  which  is  liable 
to  taxation.  This  fair  treatment  of  the  insurance  busi- 
ness by  England  and  Holland  is  due  to  a  considerable 
extent  to  the  progress  which  has  been  made  in  those 
countries  in  all  matters  pertaining  to  taxation  in  gen- 
eral, but  it  also  shows  a  knowledge  of  the  true  nature  of 
the  life  insurance  business  which  has  been  so  sadly  lack- 
ing in  this  country. 

Before  concluding  this  chapter  it  should  be  said  that 
all  taxation  of  insurance  companies  should  not  be  abol- 
ished. If  these  companies  own  real  estate,  they  should 
be  taxed  on  its  value  just  the  same  as  if  it  belonged  to 
a  private  individual.  However,  they  should  be  taxed 
on  it  only  where  the  property  is  situated,  and  not  twice 
as  Connecticut  taxes  the  companies  in  that  State.  When 
these  own  realty  outside  of  Connecticut,  of  course  they 
have  to  pay  a  tax  upon  it  in  the  state  where  it  is  located, 
and  then  Connecticut  also  levies  a  tax  upon  it.  Let  the 
companies  pay  a  tax  upon  it  but  only  once.  Again,  if  a 
company  is  carrying  on  a  life  insurance  business  upon 
the  stock  plan,  the  state  should  tax  the  capital  stock  or 
the  dividends  upon  it  just  as  it  taxes  other  capital  stock. 
That  would  only  be  just.  What  has  been  urged  in  this 
chapter  is  that  those  laws  which  levy  taxes  upon  the 
premiums  in  one  state,  and  then  upon  the  assets  or  in- 
come from  investments  in  another,  resulting  in  double 
and  often  triple  taxation,  should  be  abolished.     Special 


TAXATION  OF  INSURANCE  FUNDS.  233 

favors  for  the  insurance  business  are  not  advocated. 
Only  those  reforms  in  the  system  of  insurance  taxation 
are  desired  which  a  clear  comprehension  of  the  system 
of  old  line  life  insurance  would  indicate  as  right  and 
just.  It  is  not  expected  that  these  reforms  should  be 
made  in  insurance  taxation  alone.  As  has  been  pointed 
out  the  changes  should  come  about  through  a  general 
improvement  in  the  whole  system  of  taxation. 


CHAPTER  IX. 

SOCIAL  EFFECTS  OF  THE  ACCUMULATION"  OF  INSURANCE 

ASSETS. 

Prom  preceding  chapters  some  idea  has  been  gained 
of  the  important  effect  life  insurance  has  had  upon  the 
economic  life  of  the  country  during  the  last  fifty  years. 
During  this  period,  the  accumulations  of  the  companies 
have  grown  from  nothing  to  nearly  three  billion  dollars. 
Three  billion  dollars  have  been  taken  out  of  current 
earnings  of  three  million  policy-holders  and  added  to 
the  capital  engaged  in  productive  enterprises.  That 
this  has  influenced  greatly  the  industrial  development 
of  the  country  no  one  can  doubt,  and  not  only  must  the 
level  premium  companies  be  considered  as  agencies 
furnishing  insurance,  but  also  as  institutions  favoring 
the  accumulation  of  capital. 

However,  the  assets  which  the  companies  have  in  their 
possession  at  the  present  time  do  not  represent  all  the 
savings  of  capital  which  must  be  attributed  to  them. 
All  the  time  during  which  these  assets  have  been  ac- 
cumulating, the  companies  have  been  paying  death 
claims,    dividends,    and    surrender    values,    and    these 

234 


EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS.    235 

amounts  represent  savings  from  income  in  years  past. 
When  these  claims  are  paid,  the  capital  is  usually  not 
dissipated  but  invested  by  the  beneficiaries.  Hence,  the 
level  premium  companies  have  brought  into  existence  a 
fund  of  savings  which  includes  not  only  the  assets  now 
in  the  hands  of  the  companies,  but  some  three  or  four 
billion  dollars  now  in  private  hands  which  has  been  paid 
by  the  companies  in  death  claims  and  maturing  policies. 
This  makes  a  total  of  six  or  seven  billion  dollars  of  sav- 
ings attributable  to  this  system  of  life  insurance. 

Is  it  good  that  these  savings  should  have  been  made, 
and  would  so  much  have  been  saved  if  the  insurance 
companies  had  not  existed  I  In  answer  to  the  first  ques- 
tion, it  is  extremely  desirable  that  most  men  should  save 
something  out  of  their  annual  earnings.  Unless  they 
do  so,  there  can  be  but  little  progress  made  by  the  in- 
dividual or  by  society.  The  accumulation  of  capital 
alone  has  rendered  practicable  the  great  discoveries  of 
mankind  in  geography  and  in  the  natural  and  applied 
sciences.  All  material  progress  demands  large  amounts 
of  capital  and  if  the  insurance  companies  have  been  the 
agency  through  which  capital  has  been  saved  which 
otherwise  would  have  been  dissipated  in  the  enjoyments 
of  the  hour,  they  have  rendered  an  important  social 
service. 

In  all  probability,  a  great  part  of  the  savings  made 
by  insurance  companies  would  not  have  been  accumu- 


236     EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS. 

lated  in  any  other  way.  The  amounts  which  they  have 
taken  each  year  from  the  individual  policy-holder  have 
been  exceedingly  small.  In  1870,  the  average  premium 
on  each  policy  of  all  the  companies  doing  business  in 
New  York  was  only  ninety-six  dollars.  In  1890,  it  was 
one  hundred  and  seventeen  dollars,  but  it  has  since  de- 
creased to  an  even  hundred  dollars.  Some  of  these 
premiums  would  have  been  saved  in  other  ways  if  there 
had  been  no  life  insurance  companies,  for  insurance  ap- 
peals only  to  the  prudent  class  in  a  country  and  a  pru- 
dent man  will  save,  but  the  difficulty  of  investing  such 
small  amounts  each  year  must  be  taken  into  considera- 
tion. Savings  banks  could  not  have  been  used  for  even 
yet  only  a  few  states  are  supplied  with  such  institutions. 
The  average  man  who  saves  only  a  little  from  each 
year's  earnings  cannot  enter  the  investment  field  for 
himself.  He  cannot  take  a  hundred  dollars  and  make 
a  loan  to  a  Western  farmer.  He  might  be  able  to  buy 
one  bond  of  some  corporation,  but  the  usual  small  saver 
is  unacquainted  and  distrustful  of  such  securities.  Con- 
fronted with  the  difficulty  of  investing  small  amounts  of 
capital,  much  of  it  never  would  have  been  saved  if  it 
had  not  been  that  the  insurance  companies  with  their 
organised  agency  forces  have  constantly  kept  before  the 
public  an  easy  and  eminently  safe  method  of  investing 
in  protection.  Furthermore,  the  companies  have  not 
waited  for  people  to  come  to  them  with  their  savings, 


EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS.     237 

but  they  have  sent  their  agents  to  the  individual  to  set 
forth  the  advantages  of  what  they  had  to  offer.  In  this 
way  the  savings  of  a  class  of  people  who  are  able 
and  desirous  of  making  small  annual  savings,  if  the  op- 
portunity is  given  them,  have  been  gathered  by  the  in- 
surance companies. 

In  addition  to  the  class  of  people  who  are  able  to  save, 
but  not  to  invest,  there  is  a  class,  and  a  much  larger 
one  than  is  commonly  supposed,  which  cannot  save  any- 
thing unless  there  are  certain  definite  payments  which 
have  to  be  made  at  fixed  times  during  the  year.  To  this 
class,  level  premium  life  insurance  is  peculiarly  adapted. 
The  premiums  are  fixed,  they  can  be  divided  into  small 
payments,  and  they  fall  due  at  regular  periods.  Once 
insured,  the  policy-holder  cannot  stop  paying  or  with- 
draw his  investment  without  suffering  some  slight 
penalty.  Many  men  with  spendthrift  dispositions  have 
taken  insurance,  and  the  reserves  upon  their  policies  are 
savings  of  capital  which  would  otherwise  not  have  been 
made. 

It  is  not  claimed  that  some  of  the  savings  turned  into 
the  life  insurance  companies  would  not  have  been  made 
if  there  had  been  no  insurance  companies.  The  invest- 
ment element  in  the  policies  has  in  many  cases  been  a 
simple  substitute  for  other  investments,  and  if  the  in- 
vestment policies  had  not  existed  the  other  investments 
would  have  been  made.     We  refer  to  the  endowment 


238    EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS. 

business  of  the  companies  already  discussed  and  which 
we  believe  has  been  carried  too  far.  On  to  the  pure 
indemnity  policies  have  been  grafted  endowments  and 
various  investment  schemes,  and  agents  of  some  com- 
panies have  so  pushed  the  investment  business  that  not 
a  few  of  their  companies  partake  more  of  the  nature  of 
savings  banks  than  of  insurance  corporations.  But  even 
not  all  of  the  investment  policy  business  is  to  be  con- 
demned. Such  policies  are  admirably  fitted  for  a  large 
number  of  people  especially  the  classes  of  small  savers 
and  easy  spenders  which  have  been  noticed  above.  How- 
ever, it  must  be  true  that  many  men  have  been  induced 
to  purchase  endowment  policies  who  should  not  have 
done  so.  They  could  have  used  the  extra  cost  of  capital 
to  better  advantage  in  their  own  business.  For  this  the 
companies  and  especially  the  agents  are  to  blame.  The 
desire  for  insurance  has  played  the  large  part  in  getting 
business,  but  too  often  false  representations  are  made 
to  prospective  policy-holders  about  the  advantages  of  in- 
vesting in  endowments.  As  a  matter  of  fact,  most  men 
engaged  in  business  enterprises  or  those  who  have  access 
to  good  savings  banks  can  ill  afford  to  invest  in  endow- 
ment insurance.  The  expenses  of  the  investment  are 
too  heavy,  and  the  insurance  company  cannot  loan  the 
money  at  so  good  a  rate  as  a  man  in  business  can  get 
from  his  investments.  Therefore,  that  portion  of  the 
insurance  assets  which  have  been  taken  from  men  who 


EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS.     239 

need  capital,  but  who  have  purchased  endowment  pol- 
icies, has  meant  an  economic  loss  to  the  country.  Capi- 
tal has  been  taken  from  where  it  could  earn  eight  per 
cent,  and  placed  where  it  was  worth  only  five  or  six  per 
cent.  _-c7 

However,  as  the  endowment  business  forms  even  at 
the  present  time  only  about  one-fourth  of  the  total  busi- 
ness of  the  companies,  we  cannot  consider  that  much  loss 
has  resulted  to  the  country  from  the  investment  in  en- 
dowment policies  by  men  who  are  able  to  make  good  in- 
vestments for  their  own  capital  and  at  a  slight  cost. 
Many  of  the  investment  policies  have  been  taken  by 
small  savers  who  could  not  have  made  investments  for 
themselves.  Such  men  always  have  to  pay  high  for  what 
they  get,  and  it  has  been  far  better  that  they  would  have 
saved  something  even  at  a  high  cost  than  to  have  saved 
nothing. 

Therefore,  we  are  led  to  conclude  that  the  life  insur- 
ance companies  have  been  the  direct  agencies  by  means 
of  which  tremendous  amounts  of  capital  have  been  taken 
out  of  current  earnings  and  added  to  the  existing  supply 
in  the  country. 

The  funds  when  once  in  the  possession  of  the  com- 
panies have  not  been  kept  as  idle  cash.  They  have  been 
invested,  and  the  result  has  been  that  many  lines  of  in- 
dustry have  been  benefited.  In  discussing  just  what  in- 
fluence these  large  accumulations  have  had,  the  first 


240    EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS. 

thing  to  notice  is  the  effect  upon  the  distribution  of  capi- 
tal between  the  various  sections  of  the  country.  The 
life  insurance  business  has  been  localised  so  far  as  the 
situation  of  the  companies  is  concerned.  Outside  of  five 
or  six  states  in  the  East,  there  are  only  two  companies 
which  have  obtained  much  size.  Although  the  com- 
panies have  been  located  in  the  East,  they  have  written 
insurance  in  every  state.  It  has  been  frequently  claimed 
that  bad  results  have  followed  from  this  situation.  It 
is  urged  that  the  companies  located  in  a  small  section 
of  the  country  have,  through  the  collection  of  premiums, 
drained  capital  from  other  places  where  it  was  much 
needed,  and  have  added  it  to  a  section  already  well 
endowed. 

Formerly  the  complaint  against  this  effect  of  the  in- 
surance business  came  largely  from  the  middle  West. 
To-day  it  is  coming  from  the  South.  A  few  years  ago 
when  Mr.  Culberson  was  Governor  of  Texas  in  a  mes- 
sage to  the  Legislature  of  that  State,  he  declared  that 
Texas  from  1886  to  1887  had  sent  out  twenty-five  mil- 
lion dollars  more  in  premiums  to  insurance  companies 
than  these  companies  had  returned  in  the  same  period. 
He  ascribed  much  of  the  difficulty  in  getting  capital  in 
Texas  to  this  drain  and  pointed  to  the  plethora  of  capi- 
tal in  ISTew  York,  to  which  place  most  of  the  premiums 
had  gone.1  Last  Fall  a  Southern  writer  pointed  out 
1  The  Insurance  Spectator,  1897,  Volume  58,  Page  38. 


EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS.     241 

that  in  1903  residents  of  Southern  states  paid  fifty 
million  dollars  in  premiums  to  Northern  companies.1 

We  saw  in  a  previous  chapter  that  the  belief  that  their 
states  were  being  depleted  of  capital  led  certain  legis- 
latures to  pass  laws  compelling  the  investment  of  the  re- 
serves in  the  state  where  they  originated.  A  great  num- 
ber of  taxes  have  been  levied  to  stop  the  supposed  flow 
of  capital,  and  public-spirited  citizens  have  been  con- 
cerned as  how  to  build  up  home  companies  in  order  to 
keep  the  insurance  premiums  within  the  state. 

Have  there  been  any  grounds  for  believing  that  the 
location  of  the  companies  has  been  a  disturbing  feature 
in  our  economic  development  ?  The  answer  is  that  the 
location  of  the  home  office  of  a  company  in  a  particu- 
lar state  does  not  ipso  facto  affect  the  distribution  of 
capital  at  all  between  the  various  sections  of  the  country. 
A  company  may  be  located  in  Portland,  Maine,  and 
make  its  investments  in  San  Antonio,  Texas.  The  pay- 
ment of  premiums  to  an  out-of-state  company  does  not 
necessarily  mean  that  capital  has  gone  out  of  the  state. 
I}ven  the  checks  by  means  of  which  the  premiums  are 
paid  may  never  have  gone  to  the  home  office  of  the  com- 
pany. They  may  be  deposited  in  a  local  bank,  and  the 
company  may  make  loans  on  mortgages  on  real  estate  in 
that  vicinity,  or  buy  municipal  bonds  or  bonds  of  a  rail- 


i  New  York  Times,  September  3,  1905. 
16 


\ 


242    EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS. 

road  in  that  state.  In  that  case,  there  has  been  no  drain 
of  capital  out  of  the  state. 

If  many  of  the  premiums  have  been  collected  in  states 
needing  capital  as  evidenced  by  a  higher  rate  of  interest 
than  in  other  sections,  the  tendency  would  have  been 
for  capital  to  flow  to  those  states.  Theoretically,  the 
companies  make  investments  where  the  rate  of  interest 
is  highest,  and  therefore,  the  location  of  the  company 
has  no  harmful  effect  upon  the  distribution  of  capital  in 
the  country. 

If  there  is  nothing  in  the  location  of  the  companies 
which  in  theory  makes  necessary  a  depletion  of  capital 
in  one  section  of  the  country,  why  has  there  been  so 
much  complaint  about  Eastern  companies?  There  are 
three  reasons.  First,  men  have  not  seen  clearly  and 
understood  its  significance  the  fact  that  the  funds  could 
be  owned  in  Boston  and  the  capital  in  which  they  are 
invested  located  in  Illinois,  thus  giving  to  Illinois  the 
advantage  of  the  accumulation  of  insurance  assets. 

Secondly,  capital  in  actual  practise  has  not  been  so 
mobile  as  to  respond  readily  to  the  most  urgent  demands 
for  its  use.  It  may  go  where  it  is  most  needed,  but  it 
goes  slowly.  A  man  in  New  York  hesitates  to  invest 
capital  in  Texas.  It  is  too  far  away,  he  cannot  estimate 
the  risk,  and  the  result  is  that  he  invests  nearer  home. 
It  will  be  seen  later  that  this  timidity  of  capital  has  not 


EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS.     243 

affected  insurance  investments  a  great  deal,  but  never- 
theless it  must  be  considered. 

The  third  cause  for  complaint  by  certain  sections  is 
a  just  one.  There  has  been  an  abstraction  of  capital 
from  certain  regions  and  it  has  not  always  been  re- 
turned. The  reason  why  the  return  investments  have 
not  been  made  by  the  insurance  companies  is  the  state 
laws  which  have  been  imposed  upon  them.  No  matter 
how  much  managers  of  life  insurance  companies  may 
have  wanted  to  invest  the  funds  in  certain  localities, 
they  have  not  always  been  allowed  to  do  so.  This  has 
not  been  a  fault  of  location  except  in  the  sense  that  if  a 
company  happened  to  be  located  in  New  York,  for  years 
it  was  not  allowed  to  make  mortgage  loans  outside  the 
state,  and  there  were  many  sections  which  needed  capi- 
tal which  had  no  other  security  to  offer  for  loans  than 
real  estate.  Thus  it  is  seen  that  the  complaint  about 
the  location  of  insurance  companies  having  a  bad  effect 
upon  the  distribution  of  capital  in  the  country  has  been 
partly  due  to  ignorance  of  the  distinction  between  capi- 
tal and  its  ownership,  partly  to  the  immobility  of  capi- 
tal and  partly  to  state  laws. 

That  the  state  laws  have  had  a  greater  effect  upon  the 
investment  of  the  insurance  funds  than  timidity  of  the 
management  in  investing  is  shown  by  the  fact  that  when- 
ever the  state  in  which  the  companies  are  located  have 
not  placed  restrictions  in  the  way,  many  of  the  pre- 


244    EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS. 

miums  have  been  returned  to  the  states  from  whence 
they  came  through  loans  and  investments.  If  New  York 
had  not  for  years  attempted  to  keep  a  large  part  of  her 
companies'  assets  invested  within  her  borders,  much  of 
the  sectional  difficulties  which  have  resulted  in  laws 
and  taxes  would  have  been  avoided.  The  Connecticut 
and  Massachusetts  companies,  not  confined  to  one  state 
for  their  investments,  sent  capital  to  those  regions  where 
it  was  much  in  demand,  and  in  so  doing  relieved  to  a 
considerable  extent  the  unfortunate  situation  of  having 
the  large  companies  nearly  all  in  one  small  section  of 
the  country. 

It  would  be  interesting  to  know  how  great  has  been 
the  influence  of  insurance  funds  upon  certain  sections 
of  the  country.  For  years,  money  was  Hve  per  cent, 
higher  in  the  West  than  it  was  in  the  East.  At  that 
time,  the  Eastern  companies  which  were  permitted  to 
do  so  sent  large  amounts  to  the  West  to  be  invested.  No 
one  knows  the  beneficial  effect  that  the  Aetna  of  Hart- 
ford had  in  Illinois  from  the  system  of  small  farm  loans 
which  it  pursued  at  a  time  when  the  farmers  could 
scarcely  get  any  capital  whatever.  The  Connecticut 
Mutual  carried  out  much  the  same  policy  but  loaned 
more  on  city  realty.  President  Greene  in  1896  stated 
that  in  the  fifty  years  of  the  existence  of  the  Connecti- 
cut Mutual  it  had  loaned  one  hundred  and  forty  million 
dollars  to  sixty  thousand  Western  men,  an  average  of 


EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS.    245 

two  thousand  dollars  to  each  man.  The  rate  of  interest 
on  farm  mortgages  in  the  great  agricultural  states  might 
have  come  down  to  its  present  level  of  five  per  cent,  and 
even  lower  without  the  aid  of  insurance  assets,  but  it  is 
doubtful.  The  Northwestern  has  had  thirty  million 
dollars  invested  in  mortgages  on  real  estate  in  Illinois 
alone,  and  to  those  loans  much  of  the  prosperity  of  the 
agricultural  interests  in  that  State  is  due.  What  the 
Northwestern  has  done  for  Illinois,  the  Union  Central 
has  done  and  is  doing  for  Ohio  and  Indiana,  though  per- 
haps not  on  so  large  a  scale.  Mutual  Benefit  fund« 
have  also  been  sent  out  West,  much  to  the  advantage  of 
that  section  as  well  as  of  the  policy-holders  in  the  com- 
pany. At  the  present  time  life  insurance  money  is 
being  used  extensively  in  the  development  of  Oklahoma, 
through  loans  upon  the  only  asset  which  the  territory 
possesses,  namely,  rich  farming  lands. 

How  important  have  been  these  loans  to  Western 
states  is  seen  by  the  experience  of  Missouri  more  than 
a  score  of  years  ago.  The  Legislature  of  that  State 
passed  a  law  placing  severe  restrictions  upon  foreign 
corporations  loaning  money  in  Missouri,  and  the  result 
was  that  the  life  insurance  companies  refused  to  loan 
any  longer  in  the  State.  Money  had  before  the  enact- 
ment of  the  law  been  freely  secured  in  Missouri  at  six 
per  cent,  upon  long  time  farm  mortgage  loans.  After 
the  law  went  into  effect  the  rate  nearly,  if  not  quite, 


24:6    EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS. 

doubled.  This  single  example  shows  how  great  has  been 
the  influence  of  the  life  insurance  assets  upon  the  de- 
velopment of  that  large  area  enbodied  in  the  North 
Central  states.  The  effect  of  the  investment  of  insur- 
ance capital  can  be  seen  clearly  in  this  region,  for  it 
was  without  any  capital  only  a  short  time  ago.  Because 
a  number  of  the  states  where  the  companies  were  located 
did  not  restrict  the  investments  to  any  particular  region 
has  this  return  flow  of  capital  to  the  states  where  much 
of  it  came  from,  and  where  it  was  needed,  been  possible. 

Doubtless  life  insurance  assets  have  had  as  much  in- 
fluence upon  the  development  of  railroads  as  they  have 
had  upon  the  agricultural  interests  in  certain  sections. 
Perhaps  they  have  had  even  more  effect,  for  a  larger 
amount  of  capital  in  proportion  to  the  total  capital  used 
in  railroad  development  has  been  furnished  by  the  in- 
surance companies  than  they  have  supplied  to  agricul- 
ture in  proportion  to  the  total  invested  in  that  industry. 
The  insurance  companies  have  not  been  pioneers  in  rail- 
road building,  at  least  not  to  any  extent,  but  when  the 
roads  have  once  been  put  upon  a  paying  basis,  the  insur- 
ance corporations  have  been  large  purchasers  of  their 
securities.  Thus  have  they  freed  private  speculative 
capital  of  staying  in  secure  enterprises,  and  have  al- 
lowed it  to  be  used  in  building  new  roads. 

The  insurance  accumulations  have  had  an  important 
effect  upon  public  loans.     While  many  such  loans  now 


EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS.     247 

bear  a  rate  of  interest  too  low  to  be  attractive  to  the  in- 
surance companies,  and  as  a  result  the  companies  are 
not  large  purchasers  of  them,  this  was  not  the  situation 
only  a  short  time  ago.  For  years  the  companies  were 
heavy  bidders  for  public  bonds  and  even  yet  absorb  a 
considerable  number  issued  by  the  smaller  governmental 
units,  such  as  school  districts,  which  cannot  float  their 
securities  as  readily  as  the  large  cities.  The  insurance 
accumulations  have  made  it  easier  and  cheaper  for 
public  improvements  to  be  made,  and  while  the  very 
eagerness  of  the  companies  and  other  financial  interests 
to  secure  public  bonds  may  have  led  to  some  extrava- 
gance on  the  part  of  the  counties  and  municipalities  the 
blame  for  this  cannot  be  attributed  to  the  companies. 
Life  insurance  assets  have  helped  to  make  it  possible 
for  public  bodies  to  borrow  capital  at  a  low  rate  of 
interest  and  this  of  itself  is  a  highly  desirable  situation. 
Not  only  have  the  funds  gathered  through  the  agency 
of  the  life  insurance  companies  affected  particular  in- 
dustries directly,  they  have  indirectly  affected  all.  The 
rate  of  interest  has  declined  sharply  in  the  last  thirty- 
five  years.  Whatever  have  been  the  causes  of  this  de- 
cline, certainly  the  accumulation  of  capital  by  the  insur- 
ance business  has  been  an  important  influence.  This 
lowering  of  the  rate  of  interest  has  been  conducive  to 
greater  prosperity  of  the  country  in  general.  Therefore 
as  one  of  the  agencies  which  have  made  the  lower  rate 


248    EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS. 

of  interest  possible,  the  insurance  companies  must  be 
given  considerable  credit. 

To  the  beneficial  effect  which  insurance  funds  have 
exercised  upon  the  development  of  the  resources  of  the 
country  no  one  objects.  Regarding  the  companies  as 
savers  of  capital,  the  desire  is  universal  that  they  should 
continue  to  increase  rapidly  in  assets.  However,  from 
time  to  time  a  note  of  alarm  has  been  sounded  that  dan- 
gers may  result  from  allowing  unrestricted  growth  to 
the  companies,  and  of  late  this  alarm  has  been  expressed 
frequently.  It  has  been  experienced  in  the  United  States 
that  individual  plutocrats  have  by  the  unlimited  wealth 
which  they  command  been  able  to  control  railway  and 
other  finance.  It  is  pointed  out  that  our  life  insurance 
companies  are  becoming  vast  financial  corporations  and 
may  become  a  source  of  danger  to  the  public  by  reason 
of  the  large  money  power  lodged  in  the  hands  of  a  few 
men.  Because  of  this  possible  danger,  there  has  come  a 
demand  that  the  states  should  limit  the  business  of  the 
companies  so  as  to  keep  their  funds  from  threatening 
dimensions. 

Before  the  states  can  limit  the  business  of  the  large 
companies,  they  must  decide  when  they  are  large.  When 
is  a  company  big?  In  the  seventies  when  the  largest 
company  had  about  eighty  million  dollars  of  assets, 
there  was  a  discussion  about  limiting  the  dangerous 
growth  of  insurance  corporations.    In  the  early  nineties, 


EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS.    249 

the  largest  companies  were  approaching  the  two  hundred 
million  dollar  mark  in  assets,  and  again  the  question  of 
restricting  their  growth  was  debated.  Now  the  com- 
panies which  have  made  the  biggest  growths  have  over 
four  hundred  million  dollars  of  assets  and  if  there  is 
any  limitation  of  business  it  must  be  somewhere  beyond 
the  present  amount  of  assets.  The  company  with  ninety 
million  dollars  of  assets  is  not  now  considered  as  pos- 
sessing dangerous  power,  there  are  questions  connected 
with  its  management  which  are  of  vital  importance,  but 
these  are  not  such  that  make  it  necessary  to  restrict  its 
growth.  May  it  not  be  that  in  twenty  years  more,  five 
hundred  millions  will  not  be  considered  a  dangerous 
amount  of  assets? 

There  is  nothing  in  the  nature  of  the  case  that  makes 
danger  from  large  insurance  assets  inevitable.  A  group 
of  speculators  upon  the  market  find  it  to  their  interest 
at  times  to  derange  prices,  to  stop  industries,  and  to 
cause  widespread  commercial  depression.  Even  polit- 
ical disturbances,  such  as  war  between  nations  may 
sometimes  suit  their  purposes.  This  is  not  true  of  life 
insurance  companies,  if  they  are  managed  for  the  wel- 
fare of  their  policy-holders.  Insurance  companies,  if 
ably  managed,  will  exercise  only  a  beneficial  effect  in 
the  financial  world.  They  will  only  make  the  most 
conservative  investments  and  be  only  in  favor  of  finan- 
cial tranactions  that  are  constructive  and  conducive  to 


250    EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS. 

stable  prices,  never  in  favor  of  anything  that  is  de- 
structive. They  will  always  desire  peace,  and  never 
want  war.  If  a  management  desires  anything  else  but 
these  things,  it  means  that  the  funds  are  being  misused, 
this  is  not  a  fault  of  size,  but  of  the  management. 

The  companies  cannot  increase  in  assets  indefinitely. 
There  is  a  natural  limit  to  their  growth.  Some  day  the 
outgo  will  equal  the  income,  and  even  may  be  in  excess. 
This  result  will  come  about  through  the  operation  of  the 
law  of  mortality  and  the  problem  of  size  will  then  be 
solved.  The  states  should  do  nothing  which  tends  to 
give  the  large  companies  unusual  advantages  in  com- 
petition, and  to  this  end  should  remove  some  of  the 
obstacles  in  the  way  of  forming  new  companies.  Un- 
der the  present  conditions  new  companies  are  so  hard 
to  organise  and  get  started  that  those  established  have 
almost  a  monopoly.  With  different  laws  this  monopoly 
feature  could  be  removed. 

Already  the  large  companies  are  not  holding  their 
own  in  the  competition  with  smaller  ones.  For  years 
it  did  look  as  if  a  few  large  companies  were  going  to 
absorb  most  of  the  life  insurance  business.  In  1873, 
three  companies  had  thirty-one  per  cent,  of  all  the 
business  done  by  companies  reporting  to  the  New  York 
Insurance  Department.  This  percentage  steadily  in- 
creased until  in  1894, the  three  largest  had  fifty-five  per 
cent,  of  the  total  business.     However,  the  percentage 


EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS.    251 

began  to  decrease  so  that  in  1900  the  three  only  had 
forty-six  per  cent,  of  the  business.  Not  only  are  the 
three  largest  showing  a  relative  decline,  but  also  are  the 
six  largest  and  even  the  ten  largest,  which  shows  that 
not  only  are  the  smaller  companies  maintaining  their 
position,  but  are  absorbing  each  year  a  larger  propor- 
tion of  the  business. 

If  the  business  of  the  larger  companies  were  limited 
by  law,  is  there  any  reason  to  believe  that  the  same 
amount  of  insurance  would  be  written  as  if  there  were 
no  restrictions?  It  is  hardly  possible,  and  if  there 
would  not  be,  then  the  accumulation  of  capital  through 
the  agency  of  insurance  companies  would  be  checked. 
While  an  increase  in  the  amount  of  capital  is  not  to  be 
purchased  at  the  price  of  grave  social  dangers,  yet  the 
state  must  be  sure  that  such  dangers  would  be  the  pen- 
alty of  allowing  free  growth.  There  are  methods  of 
control  and  reform  in  management  which  should  be 
given  a  trial  before  the  extreme  measure  of  limitation 
of  business  is  adopted. 

Since  there  is  nothing  in  the  nature  of  life  insurance 
which  must  necessarily  lead  to  political  corruption  or  to 
the  abuse  of  power  in  the  financial  world,  the  limitation 
of  business  is  a  confession  that  men  cannot  be  found 
who  can  be  trusted  morally  with  the  responsibility  of 
managing  large  trustee  funds.  Nothing  which  has  been 
disclosed  in  the  investigation  of  any  company  of  im- 


252    EFFECTS  OF  THE  ACCUMULATION  OF  ASSETS. 

portance  has  shown  that  the  officers  and  trustees  were 
not  mentally  capable  of  handling  the  companies  well. 
The  trouble  has  been  with  lax  morals.  It  is  hoped  that 
these  can  be  reformed,  and  the  companies  allowed  to  go 
on  accumulating  assets  to  the  gain  of  the  individual 
policy-holder  and  of  the  country  in  general. 

Life  insurance  has  rendered  a  signal  service  to  the 
country.  It  has  compelled  those  who  have  insured  to 
exercise  economy,  and  this  has  influenced  their  careers 
for  good.  It  has  gathered  together  innumerable  small 
savings  and  has  made  them  available  for  the  develop- 
ment of  our  resources.  Mistakes  have  been  made  in 
managing  the  funds,  problems  remain  yet  to  be  solved, 
but  these  should  be  met  in  a  spirit  of  encouragement  to 
the  business,  for  life  insurance  should  be  encouraged. 
The  companies  relieve  distress  which  can  be  relieved 
in  no  other  way,  and  accumulate  capital  which  other- 
wise would  be  dispersed. 


INDEX. 


INDEX. 


Abuses  in  management,  192-3. 

Accrued  interest,  as  an  asset, 
21 ;  as  affecting  the  rate  of 
earnings,  69,  70. 

Accumulation  of  capital  by  in- 
surance companies,  234-6. 

Aetna,  rate  of  earnings,  on  total 
assets,  74  ;  on  real  estate,  83  ; 
on  mortgage  loans,  89 ;  on 
bonds  and  stocks,  97  ;  cost  of 
investing,  115 ;  loans  in  the 
West,  244  ;  management,  199. 

Agio  theory  of  interest,  106-7. 

American  Life  Insurance  Com- 
pany, failure,  142-3  ;  reasons, 
191. 

Armstrong  committee,  results 
of  exposures,  159. 

Assets,  cost  of  investing,  116-17, 
121 ;  market  value,  66 ;  rate 
of  earning  power,  74-6  ;  tax- 
ation of,  214-17. 

Australia,  assets  of  companies 
in,  45-6 ;  legal  regulation, 
174 ;  rate  of  interest.  103. 

Australasian  Mutual  Provident, 
method  of  electing  manage- 
ment, 210. 

Berkshire,  charter  of,  160  ; 
cost  of  investing  assets,  115 ; 
finance  committee,  198  ;  rate 
of  earnings,  on  assets,  74  ;  on 
bonds  and  stocks,  97  ;  on  mort- 
gage loans,  89  ;  on  real  estate, 
83. 

Bonds  and  stocks,  compared 
with  mortgage  loans,  101-2  ; 
cost  of  investing  in,  122-3  ; 
decline  in  earning  rate,  101  ; 
power   conferred  by    owner- 


ship of,  111 ;  rate  of  earnings, 
97—9. 

Canada,  character  of  invest- 
ments in,  44 ;  legal  regulation 
in,  172-3 ;  rate  of  interest, 
103. 

Capital  stock,  investment  of, 
150-4. 

Cash,  as  an  asset,  15-19;  with 
English  companies,  48-9. 

Character  of  assets,  Australasi- 
an companies,  45-6  ;  Can- 
adian companies,  44 ;  English 
companies,  47-9  ;  French  com- 
panies, 50-2  ;  German  com- 
panies, 49-50  ;  United  States 
companies,  10-54. 

Charter  Oak,  cause  of  failure, 
191  ;  charter  provisions,  186 ; 
failure  of,  139-142. 

Charter  regulations  of  invest- 
ments, 150-1. 

City  bonds  as  an  investment,  38. 

Collateral  loans  as  an  invest- 
ment, 34-35. 

Company  management,  190-212. 

Connecticut,  taxation  in,  226-8. 

Connecticut  Mutual,  charter 
regulations,  160  ;  character  of 
assets,  11 ;  loans  in  the  West, 
244-5  ;  rate  of  earnings,  on  as- 
sets, 74  ;  on  bonds  and  stocks, 
97  ;  on  mortgages,  89  ;  on  real 
estate,  83  ;  reduction  in  inter- 
est rate,  58. 

Continental  Life  of  N.  Y.,  fail- 
ure of,  135. 

Continental  Life  of  Hartford, 
failure  of,  142. 

Control  of  the  assets,  190-213. 


255 


256 


INDEX. 


Corporation  securities,  as  an  in- 
vestment, 39-42  ;  dangers  of, 
53-4  ;  legal  provisions  con- 
cerning, 166-7. 

Cost  of  investing,  in  general, 
112-126  ;  in  bonds,  122-3  ;  in 
mortgage  loans,  122-3. 

County  bonds  as  an  investment, 
37-8. 

Culberson,  Gov.  of  Texas, 
quoted,  240. 

Deferred  and  outstanding  pre- 
miums, 20. 

Departments  of  insurance,  147-9. 

Directors,  duties  of,  195-200; 
"  dummy,"  132,  196-7. 

Double  taxation,  224-5. 

Duties  of  policy-holders,  204-9. 

Distribution,  of  assets,  14,  of 
capital  in  country,  240-7. 

Eagle  Life  and  Health,  failure 
of,  128. 

Earnings,  rate  of,  55-111. 

Election  of  trustees,  204-12. 

Endowment  policies,  benefits 
and  disadvantages,  237-9. 

England,  character  of  assets  in, 
47-8  ;  legal  regulation  in,  173  ; 
rate  of  interest  in,  104-5  ;  tax- 
ation in,  231. 

Equitable,  expense  of  invest- 
ing, 115 ;  management  of, 
198  ;  rate  of  earnings,  on  as- 
sets, 74  ;  on  bonds  and  stocks, 
97  :  on  mortgage  loans,  89  : 
on  real  estate,  83. 

European  capital  in  U.  S.,  198. 

Failures  of  insurance  com- 
panies, 127-145. 

Finance  committees,  composi- 
tion of ,  197-9. 

Fisher,  Prof.  Irving,  referred  to, 
108,  223. 

Foreclosure  of  mortgage  loans, 
94-6. 

Foreign  bonds,  investment  in, 
36-7. 

Foreign  countries,  legal  require- 
ments of,  171-2. 


France,  legal  regulation  in,  174- 

5. 
Fraudulent  companies,  176-8. 

Gain  and  loss  exhibit,  114-5. 

Gas  and  water  company  bonds 
as  an  investment,  40. 

Germania,  finance  committee 
of,  198 ;  mortgage  loans  of, 
95  ;  rate  of  earnings,  on  as- 
sets, 74  ;  on  bonds  and  stocks, 
97  ;  on  mortgage  loans,  89  ; 
on  real  estate,  83. 

Germany,  character  of  assets, 
49-50 ;  legal  regulation  in, 
174  ;  rate  of  interest  in,  105-6. 

Globe  insurance  company,  fail- 
ure of,  137-8 ;  mismanage- 
ment of,  191 ;  rate  of  interest 
assumed,  56. 

Gotha  Mutual  Life  company, 
rate  of  interest  made  by,  105- 
6. 

Gross  assets,  taxation  of.  214-16. 

Gross  premiums,  taxation  of, 
216-17. 

Guarantee  capital,  necessity  of, 
203. 

Home      insurance      company, 

finance    committee    of,   198 ; 

rate  of    earnings,   on  assets, 

74 ;  on  bonds  and  stocks,  97  ; 

on   mortgage    loans,   89  ;    on 

real  estate,  83. 
Home  office  buildings,  rate  of 

return,  -87-8  ;  Charter  Oak's 

experience  with,  140. 
Holland,  taxation  of  insurance 

in,  231-2. 

Insurance  departments,  188-9. 

Insurance  laws,  early  Massa- 
chusetts, 146-7. 

Interest  rate,  effect  of  war  on, 
107-8  ;  and  prices,  108-9. 

Investments,  expenses  of  mak- 
ing, 112-126  ;  fluctuations  in 
value,  67-8.  100;  legal  regu- 
lation of,  160-89  ;  methods  of 
making,  200. 

Investment  policies,  237-9. 


INDEX. 


257 


^John  Hancock,  expense  of  in- 
vesting, 115  ;  rate  of  earnings, 
on  assets,  74 ;  on  bonds  and 
stocks,  97  ;  on  mortgage  loans, 
89  ;  on  real  estate,  83. 

Kentucky,  legal  regulation  in, 
168  ;  taxation  in,  228. 

Kentucky  Mutual  insurance 
company,  failure  of,  129. 

Knickerbocker  insurance  com- 
pany, failure  of,  138. 

Legal  regulations  of  invest- 
ments, in  Australia,  174 ;  in 
Canada,  172-3  ;  in  England, 
173-4  ;  in  France,  174-5  ;  in 
Germany,  174  ;  in  New  York, 
151  ;  in  United  States,  146- 
189  ;  objections  to,  184-9  ;  per- 
nicious effects  of,  186  ;  as  to 
real  estate,  155-160  ;  what  is 
necessary,  145. 

Life  Association,  failure  of,  137, 

Limitation  of  size  of  companies, 
248-251. 

Location  of  companies,  effects 
of,  241-5. 

Management,  evils  in,  192-3. 

Manhattan,  character  of  assets, 
11 ;  rate  of  earnings,  on  as- 
sets, 74  ;  on  bonds  and  stocks, 
79  ;  on  mortgage  loans,  89  ;  on 
real  estate,  83. 

Massachusetts  Mutual,  finance 
committee  of,  198  ;  rate  of 
earnings,  on  assets,  74 ;  on 
bonds  andstocks,  97  ;  on  mort- 
tges,  89  ;  on  real  estate,  83. 
tetropolitan,  rate  of  earnings, 
on  assets,  74;  on  bonds  and 
stocks,  97  ;  on  mortgage  loans, 
89  ;  on  real  estate,  83. 

Michigan  Mutual,  cost  of  invest- 
ing, 122  ;  finance  committee 
of,  198  ;  rate  of  earnings,  on 
assets,  75 ;  on  bonds  and 
stocks,  98  ;  on  mortgages,  90  ; 
on  real  estate,  84. 

Minnesota  insurance  report, 
quoted,  115. 

i7 


Mismanagement,  causes  of  legis- 
lation, 7. 

Missouri,  effect  of  insurance 
loans  in,  245-6. 

Mobility  of  capital,  242-3. 

Mortgage  loans,  as  an  asset  of 
early  companies,  12  ;  com- 
pared with  bonds  and  stocks, 
101-2  ;  costs  of  making,  122- 
3  ;  depreciation  in  value,  31 ; 
of  English  companies,  48 ; 
foreclosure  of,  31-2 ;  of  Ger- 
man companies,  50  ;  good 
qualities  of  as  an  investment, 
52-3;  history  of,  25-32;  loss 
on,  94-6,  144  ;  of  New  York 
companies,  164  ;  and  panics, 
28-30 ;  profitable  return  of, 
111  ;  rate  of  earnings,  89-91  ; 
in  the  West,  27. 

Mutual  Life  of  New  York,  char- 
ter provisions,  160 ;  finance 
committee  of,  198  ;  proxy  vot- 
ing in,  206,  rate  of  earnings 
on  assets,  75 ;  on  bonds  and 
stocks,  98  ;  on  mortgages,  90  ; 
on  real  estate,  84. 

Mutual  Benefit,  character  of  as- 
sets, 11  ;  cost  of  investing, 
122 ;  mortgage  loans  of,  245  ; 
rate  of  earnings,  on  assets,  75  ; 
on  bonds  and  stocks,  98  ;  on 
mortgage  loans,  90  ;  on  real 
estate,  84. 

Mutual  companies,  formation 
and  control  of,  203-12. 


National  bank  stocks,  restric- 
tions concerning,  168. 
National  Life  of  Vermont,  char- 
ter provisions,    160  ;    rate    of 
earnings,    on  assets,   75 ;    on 
bonds    and    stocks,   98  ;     on 
mortgage   loans,  90  ;  on  real 
estate,  84. 
Nevf  England  Life,  formation 
yof ,  2 ;  assets  of,  11  ;  rate  of 
^earnings  of,  on  total  assets, 
75 ;  on  bonds  and  stocks,  98 ; 
on  mortgage  loans,  90  ;  on  real 
estate,  84. 


258 


INDEX. 


New  Jersey  Mutual,  failure  of, 
136-7. 

New  York  law  regulating  mort- 
gage loans,  164,  effects  of  243- 
4. 

New  York  insurance  depart- 
ment, creation  of,  13. 
,  New  York  Life,  assets  of,  11 ; 
k  finance  committee  of,  198  ;  in- 
corporation of,  3 ;  investment 
expenses,  122-3  ;  proxy  voting 
in,  206  ;  rate  of  earnings  on  as- 
sets, 75  ;  on  bonds  and  stocks, 
98  ;  on  mortgage  loans,  90 ;  on 
real  estate,  84. 

North  American  Life,  failure  of, 
134-5. 

Northwestern,  charter  provis- 
ions, 162  ;  mortgage  loans  of, 
245  ;  rate  of  earnings,  on  as- 
sets, 75  ;  on  bonds  and  stocks, 
98 ;  on  mortgage  loans,  90  ; 
on  real  estate,  84. 

Ohio  Life  and  Trust  company, 
failure  of,  129. 

Pacific  Mutual,  rate  of  earn- 
ings, on  assets,  75  ;  on  bonds 
and  stocks,  98  ;  on  mortgage 
loans,  90  ;  on  real  estate,  84. 

Panics,  effects  on  investments, 
131-2;  cause  of  legislation, 
165  ;  and  the  rate  of  interest, 
78,  107. 

Penn.  Mutual,  charter  provis- 
ions, 160  ;  mortgage  loans  of, 
95 ;  rate  of  earnings,  on  as- 
sets, 75  ;  on  bonds  and  stocks, 
98 ;  on  mortgage  loans,  90 ; 
on  real  estate,  84. 

Phoenix  Mutual,  charter  pro- 
visions, 161  ;  finance  commit- 
tee of,  199 ;  rate  of  earnings, 
on  assets,  75  ;  on  bonds  and 
stocks,  98 ;  on  mortgage  loans, 
90  ;  on  real  estate,  84. 

Piedmont  and  Arlington,  fail- 
ure of,  138. 

Policy  loans,  as  an  investment, 
23-5  ;  of  Australian  com- 
panies, 46  ;  of  English  com- 


panies, 48  ;  permission  to  in- 
vest in,  167. 

Premium  notes,  21-3. 

Premium  on  gold,  77-8. 

Premiums,  taxation  of,  216-17, 
229-31. 

President,  duties  of,  199-200. 

Prices  and  the  rate  of  interest, 
108-9. 

Provident  Life  and  Trust,  rate 
of  earnings,  on  assets,  76  ;  on 
bonds  and  stocks,  99 ;  on  mort- 
gage loans,  91  ;  on  real  estate, 
85. 

Provident  Savings,  rate  of 
earnings,  on  assets,  76  ;  on 
bonds  and  stocks,  99  ;  on  mort- 
gage loans,  91 ;  on  real  estate, 
85. 

Proxy  voting,  204-9. 

Prudential,  rate  of  earnings,  on 

/  assets,    76  ;     on    bonds    and 

§/  stocks,  99  ;  on  mortgage  loans, 
91 ;  on  real  estate,  85. 

Public,  the,  and  company  man- 
agement, 179-80. 

Publicity,  attempts  to  secure, 
149-50 ;  value  of  and  failure 
of,  178-81. 

Railroad  bonds  as  an  invest- 
ment, 39-40. 

Rate  of  earnings,  of  bonds  and 
stocks,  97-9  ;  in  Civil  War 
period,  27  ;  in  colonial  times, 
61  ;  by  Australasian  compan- 
ies, 103 ;  Canadian  companies, 
103  ;  English  companies,  104- 
5  ;  German  companies,  105-6  ; 
in  New  Zealand,  103-4 ;  con- 
ditions determining,  106-10  ; 
cost  of  investing  and,  117-8  ; 
decline  in,  102-3  :  importance 
of,  10  ;  method  of  calculating, 
63-72  ;  legal  standard,  55-60  ; 
on  mortgage  loans,  89-91 ;  on 
real  estate,  83-5 ;  by  savings 
banks,  62;  by  United  States 
companies,  74-6. 

Real  estate,  as  an  asset,  32-4 ; 
Charter  Oak's  experience 
with,  141-2  ;  cost  of  investing 


INDEX. 


259 


in,  118-20 ;  earning  rate  of, 
83-5  ;  home  office  buildings, 
87-8  ;  legal  regulations  con- 
cerning, 156-9 ;  of  French  com- 
panies, 51-2  ;  rise  in  price,  86- 
7  ;  taxation  of,  224,  232-3. 

Reserves,  knowledge  of,  9. 

Reserve  deposit  laws,  203. 

Savings,  amount  secured  by  in- 
surance companies,  234-5. 

Savings  banks,  investment  ex- 
penses of,  124-5  ;  number  of, 
234 ;  rate  of  interest  earned 
by  62. 

Scottish  National,  rate  of  inter- 
est earned  by,  104. 

Securities,  taxation  of,  223. 

Security  Life  and  Annuity,  fail- 
ure of,  135-6. 

Small  versus  large  companies, 
251-2. 

Social  effect  of  level  premium 
insurance,  234-252. 

Spendthrifts  and  insurance,  237. 

State  bonds,  as  an  investment, 
37  ;  restriction  to,  166. 

State  deposits,  169-71. 

State  Mutual,  finance  commit- 
tee of,  198  ;  rate  of  earnings, 
on  assets,  76 ;  on  bonds  and 
stocks,  99 ;  on  mortgage  loans, 
91 ;  on  real  estate,  85. 

State  supervision,  175-189. 

Stock  investments,  danger  from, 
40-2  ;  discussion  about,  183-4. 

Stock  companies,  problems  of 
managing  and  controlling, 
195-203. 


Taxation,  insurance,  in  United 
States,  213-233,  bad  effects  of, 
227-8 ;  in  England,  231-2 ;  in 
Holland,  231  ;  of  premiums, 
229-231 ;  of  real  estate,  232-3. 


Taxes,  law  of  regulating  per- 
sonal profits,  192-3. 

Travelers  insurance  company, 
investments  in  Canada,  36  ; 
rate  of  earnings,  on  assets, 
76 ,  on  bonds  and  stocks,  99 ; 
on  mortgage  loans,  91  ;  on 
real  estate,  85. 

Trust  companies  and  insurance, 
17-19. 

Trustees,  duties  of,  195-200 ; 
election  of,  204-12. 

Union  Central,  benefit  of  ac- 
cumulations to  Indiana  and 
Ohio,  245;  cost  of  investing, 
122  ;  results  of  mortgage  loan- 
ing, 95-6,  126  ;  rate  of  earn- 
ings, on  assets,  76  ;  on  stocks 
and  bonds,  99  ;  on  mortgage 
loans,  31 ;  on  real  estate,  85. 

Union  mutual,  rate  of  earnings, 
on  assets,  76  ;  on  bonds  and 
stocks,  99  ;  on  mortgage  loans, 
91 ;  on  real  estate,  85. 

Uninvested  assets,  15-25. 

United  States  bonds  as  an  asset, 
35-6. 

United  States  Life,  assets  of,  11 ; 
decline  in  assumed  rate  of 
interest,  59  ;  rate  of  earnings 
on  assets,  76 ;  on  bonds  and 
stocks,  99  ;  on  mortgage  loans, 
91 ;  on  real  estate,  85. 

Universal  Life,  failure  of,  136. 

Valuation  of  assets,  41-2. 
Voting  by  mail,  209-10. 

War,  effect  of,  on  rate  of  inter- 
est, 130. 

Washington  Life,  rate  of  earn- 
ings, on  assets,  76  ;  on  bonds 
and  stocks,  99 ;  on  mortgage 
loans,  91 ;  on  real  estate,  85. 

Wright,  Elizur,  referred  to,  56. 


OF  - 

UNIVERSITY 

OF 


A  POLITICAL  HISTORY  OF  THE 

STATE  OF  NEW  YORK 

(1774-1861) 

By  D.  S.  ALEXANDER.    Two  volumes.    840  pp.     8vo. 
$5.00  net  (carriage  extra). 

This  work  presents  a  history  of  the  movements  of  politi- 
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braces a  series  of  brilliant  character  studies  of  the  leaders, 
most  of  them  of  national  importance,  who,  from  the  days  of 
George  Clinton,  have  drawn  the  attention  of  the  nation  to 
New  York.  The  astute  methods  and  sources  of  power  by 
which  George  Clinton,  Hamilton,  Burr,  DeWitt  Clinton, 
Van  Buren,  Seymour  and  Thurlow  Weed  each  successively 
controlled  the  political  destiny  of  the  State  are  clearly  and 
picturesquely  set  forth. 

"  It  meets  a  want  widely  felt  and  repeatedly  expressed 
during  the  past  hundred  years.  ...  It  would  be  impossible 
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esting details." — From  two  leading  articles,  aggregating 
over  ten  columns,  in  the  New  York  Sun. 

"Will  undoubtedly  take  its  place  as  the  authoritative 
work  upon  the  subject." — Boston  Transcript. 

"  Without  question  he  has  performed  .  .  .  his  task  very 
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to  be  entertaining,  dealing  with  men  in  preference  to  meas- 
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"  Well  worth  reading,  and  unique  because  it  is 
devoted  wholly  to  the  election  of  senators  and  to 
the  deliberations  of  the  Senate."— Boston  Tran- 
script. 

"  Able  and  dispassionate,  and  ought  to  be  widely 
read." — New  York  Commercial. 


A    NEW    EDITION    UP    TO    DATE 


WALLACE'S    RUSSIA 

By  Sir  DONALD  MACKENZIE  WALLACE 
With  two  colored  maps,  $5.00  retail 

The  first  edition  of  Wallace's  "Russia"  was  published  in 
1877,  and  was  at  once  accepted  as  the  leading  authority  in 
English.  The  author  has  brought  the  book  up  to  date,  and 
the  present  edition,  rewritten  throughout  and  greatly  en- 
larged, may  now  be  accepted,  as  the  first  one  was,  for  the 
one  work  in  our  language  most  needed  by  those  who  care  to 
understand  Russia. 

Contents:  Travelling  in  Russia;  In  the  Northern  Forests; 
Voluntary  Exile;  The  Village  Priest;  A  Medical  Consultation;  A 
Peasant  Family  of  the  Old  Type;  The  Peasantry  of  the  North;  The 
Mir  or  Village  Community;  How  the  Commune  has  been  preserved 
and  what  it  is  to  effect  in  the  Future;  Finnish  and  Tartar  Villages; 
Lord  Novgorod  the  Great;  The  Towns  and  the  Mercantile  Classes; 
The  Pastoral  Tribes  of  the  Steppe;  The  Mongol  Domination;  The 
Cossacks;  Foreign  Colonists  on  the  Steppe:  Among  the  Heretics;  The 
Dissenters;  Church  and  State;  The  Noblesse;  Landed  Proprietors  of 
the  Old  School;  Proprietors  of  the  Modern  School;  Social  Classes; 
The  Imperial  Administration  and  the  Officials  ;  Moscow  and  the 
Slavophils;  St.  Petersburg  and  European  Influence  ;  The  Crimean 
War  and  its  Consequences  ;  The  Serfs  :  The  Emancipation  of  the 
Serfs;  The  Landed  Proprietors  since  the  Emancipation;  The  Emanci- 
pated Peasantry;  The  Zemstvo  and  the  Local  Self-Government;  The 
New  Law  Courts;  Revolutionary  Nihilism  and  the  Reaction;  Socialist 
Propaganda  ;  Revolutionary  Agitation  and  Terrorism  ;  Industrial 
Progress  and  the  Proletariat;  The  Revolutionary  Movement  in  its 
Latest  Phase;  Territorial  Expansion  and  Foreign  Policy;  The  Present 
Situation. 

"One  of  the  stoutest  and  most  honest  pieces  of  work  produced  in 
our  time ;  and  the  man  who  has  produced  it,  .  .  .  even  if  he  never 
does  anything  more,  will  not  have  lived  in  va\n."—FortnigMly 
Review. 

M  Excellent  and  interesting,  .  .  .  worthy  of  the  highest  praise. 
.  .  .  Not  a  piece  of  clever  book-making,  but  the  result  of  a  large 
amount  of  serious  study  and  thorough  research.  .  .  .  We  commend 
his  book  as  a  very  valuable  account  of  a  very  interesting  people."— 
The  Nation. 


Henry     Holt     and     Company 

«9  W.  23D  Street  (vii,  '05)  New  York 


AMERICAN     FOREIGN     POLICY 
OUR    PHILIPPINE    PROBLEM 

By  Prof.  HENRY  PARKER  WILLIS 
A  study  of  American  Colonial  Policy.  i2mo,  $1.50  net 
(By  mail,  $1.64) 
A  book  of  vital  interest,  based  on  personal  investiga- 
tion in  the  Philippines  by  a  former  editorial  writer  of  the 
New  York  Evening  Post,  who  was  also  Washington 
correspondent  of  the  New  York  Journal  of  Commerce 
and  Springfield  Republican,  and  is  now  a  professor  in 
Washington  and  Lee  University. 

"Anyone  desiring  to  inform  himself  fully  as  to  the  history,  pol- 
itics, public  questions,  in  short,  everything  dealing  with  the  subject 
of  American  control  of  the  Philippines  from  the  day  Dewey  entered 
Manila  harbor  to  the  present,  will  find  Mr.  Willis's  work  a  most  im- 
portant book.  .  .  .  He  writes  of  the  Filipinos  as  he  found  them,  and 
with  the  knack  of  the  true  investigator,  has  avoided  falling  in  with 
the  political  views  of  any  party  or  faction.  More  valuable  still  is  his 
exposition  of  the  Philippine  question  in  its  bearings  on  American 
life  and  politics.  A  most  exhaustive,  careful,  honest  and  unbiased 
review  of  every  phase  of  the  question." — The  Washington  Post. 

"A  keen,  exhaustive  and  merciless  criticism  of  the  whole  Philip- 
pine experiment.  .  .  .  His  unsparing  analysis  of  all  the  departments 
of  Philippine  government  must  (however)  command  respect  as  able, 
honest  and  sincere  ...  no  other  book  contains  more  solid  truth,  or 
a  greater  section  of  the  truth." — Springfield  Republican, 

AMERICA,  ASIA    AND    THE 
PACIFIC 

By  WOLF  von  SCHIERBRAND 
Author  of  "  Germany  of  To-day  " 

Considers  America's  relations  to  all  the  countries  affected 
by  the  Panama  Canal,  to  those  on  both  coasts  of  the 
Pacific,  and  to  the  islands,  besides  analyzing  the  strength 
and  weakness  of  our  rivals.  13  maps,  334  pp.  $1.50  net. 
By  mail,  $1.62. 

"A  most  interesting  treatise  .  .  .  having  an  important  bearing 
upon  our  future  progress." — Public  Opinion. 

"His  observations  on  the  Panama  Canal  and  the  future  of  the 
Dutch  East  Indies  are  particularly  interesting  and  suggestive." 

— Review  of  Reviews. 

"An  interesting  .  .  .  survey  of  a  broad  field  .  .  .  contains  a  great 
yariety  of  useful  information  .  .  .  especially  valuable  to  American 
exporters. "— Outlook. 

Henry     Holt     and     Company 

*.9  W.  23d  Street  (v,  'o6j  New  York 


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ORM  NO  DD  6,  40m,  6'76           UNIVERSITY  OF  CALIFORNIA,  BERKELE 

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GENERAL  LIBRARY  -  U.C.  BERKELEY 


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